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what role do commercial banks play in the economy | commercial banks are crucial to the fractional reserve banking system currently found in most developed countries this allows banks to extend new loans of up to typically 90 of the deposits they have on hand theoretically growing the economy by freeing capital for lending | |
is my money safe at a commercial bank | for the most part yes commercial banks are heavily regulated and most deposit accounts are covered up to 250 000 by the federal deposit insurance corporation 8 moreover commercial and investment banking funds cannot be co mingled by law 8the bottom linecommercial banks are a critical component of the u s economy by providing vital capital to businesses and individuals in the form of credit and loans they provide a secure place where people save money earn interest and make payments through checks debit cards and credit cards commercial banks are typically in brick and mortar locations in cities and towns many with extensive branch networks a growing number have no physical location however instead they are accessible online and through mobile applications | |
what is a commercial loan | a commercial loan is a debt based funding arrangement between a business and a financial institution such as a bank it is typically used to fund major capital expenditures and or cover operational costs that the company may otherwise be unable to afford expensive upfront costs and regulatory hurdles often prevent small businesses from having direct access to bond and equity markets for financing this means that not unlike individual consumers smaller businesses must rely on other lending products such as lines of credit unsecured loans or term loans | |
how commercial loans work | commercial loans are granted to a variety of business entities usually to assist with short term funding needs for operational costs or for the purchase of equipment to facilitate the operating process in some instances the loan may be extended to help the business meet more basic operational needs such as funding for payroll or to purchase supplies used in the production and manufacturing process these loans often require that a business posts collateral usually in the form of property plant or equipment that the bank can confiscate from the borrower in the event of default or bankruptcy sometimes cash flows generated from future accounts receivable are used as a loan s collateral mortgages issued to commercial real estate are one form of commercial loan commercial loans are most often used for short term funding needs special considerationsas is true for nearly every type of loan the creditworthiness of an applicant plays a starring role when a financial institution considers giving out a commercial loan in most cases the business applying for the loan will be required to present documentation generally in the form of balance sheets and other similar documents that proves the company has a favorable and consistent cash flow this assures the lender that the loan can and will be repaid according to its terms if a company is approved for a commercial loan it can expect to pay a rate of interest that falls in line with the prime lending rate at the time the loan is issued banks typically require monthly financial statements from the company through the duration of the loan and often require the company to take out insurance on any larger items purchased with funds from the loan types of commercial loansa commercial loan is most often thought of as a short term source of funds for a business short duration loans for commercial real estate are called mini perm they usually have a three to five year term there are some banks and other financial institutions that offer renewable loans that can extend indefinitely this allows the business to get the funds it needs to maintain ongoing operations and to repay the first loan within its specified time period after this the loan may be rolled into an additional or renewed loan period a business will often seek a renewable commercial loan when it must obtain the resources it needs to handle large seasonal orders from certain customers while still being able to provide goods to additional clients | |
what are commercial mortgage backed securities cmbs | commercial mortgage backed securities cmbs are fixed income investment products that are backed by mortgages on commercial properties rather than residential real estate cmbs can provide liquidity to real estate investors and commercial lenders alike because there are no rules for standardizing the structures of cmbs their valuations can be difficult the underlying securities of cmbs may include a number of commercial mortgages of varying terms values and property types such as multi family dwellings and commercial real estate cmbs can offer less of a pre payment risk than residential mortgage backed securities rmbs as the term on commercial mortgages is generally fixed | |
how commercial mortgage backed securities cmbs work | as with collateralized debt obligations cdo and collateralized mortgage obligations cmo cmbs are in the form of bonds the mortgage loans that form a single commercial mortgage backed security act as the collateral in the event of default with principal and interest passed on to investors the loans are typically contained within a trust with different terms property types and amounts the underlying loans that are securitized into cmbs include loans for properties such as apartment buildings and complexes factories hotels office buildings office parks and shopping malls often within the same trust a mortgage loan is typically what is considered a non recourse debt any consumer or commercial debt that is secured only by collateral in case of default the lender may not seize any assets of the borrower beyond the collateral because cmbs are complex investment vehicles they require a wide range of market participants including investors a primary servicer a master servicer a special servicer a directing certificate holder trustees and rating agencies each of these players performs a specific role to ensure that cmbs performs properly the cmbs market accounts for approximately 2 of the total u s fixed income market types of cmbsthe mortgages that back cmbs are classified into tranches according to their levels of credit risk which typically are ranked from senior or highest quality to lower quality the highest quality tranches will receive both interest and principal payments and have the lowest associated risk lower tranches offer higher interest rates but the tranches that take on more risk also absorb most of the potential loss that can occur as the tranches go down in rank the tranches are usually divided as follows the lowest tranche in a cmbs structure will contain the riskiest and possibly speculative loans in the portfolio the securitization process that s involved in designing a cmbs s structure is important for both banks and investors it allows banks to issue more loans in total and it gives investors easy access to commercial real estate while giving them more yield than traditional government bonds investors should understand however that in the case of a default on one or more loans in a cmbs the highest tranches must be fully paid off with interest before the lower tranches will receive any funds components of a cmbscriticism of cmbstypically only very wealthy investors invest in cmbs because there are not many options here for the average investor it s difficult to find mutual funds or exchange traded funds etf that invest solely in this asset class though many real estate mutual funds invest a portion of their portfolios into cmbs requirements for cmbsin december 2016 the securities and exchange commission sec and financial industry regulatory authority finra introduced new regulations to mitigate some of the risks of cmbs by creating margin requirements for covered agency transactions including collateralized mortgage obligations advantages and disadvantages of a cmbsas with other types of debt securities investors assume certain risks when they purchase a cmbs however there are some features that make them popular for borrowers and investors cmbs loans come with fixed interest rates meaning that repayments will not fluctuate over the lifetime of the loan this is a benefit for commercial borrowers who cannot count on their revenues increasing with the loan terms a cmbs loan is non recourse meaning that lenders cannot hold borrowers personally responsible if they fail to repay the loan however there are some circumstances such as fraud or misrepresentation that would give investors recourse against the borrower | |
when a mortgaged property is sold the new owner is able to assume the previous owner s loan for a fee this makes it easier to buy and sell properties without taking out a new loan | borrowers must pay a penalty if they pay off the loan early in order to compensate investors for the interest they would have received in later years these penalties are typically riskier than the prepayment penalties for residential mortgages some cmbs contracts include a defeasance clause meaning that if the borrower pays off the loan early they must replace the lost interest and collateral with similar securities for example if a borrower prepays their loan they may be required to purchase treasury securities with enough cash flow to compensate investors for the lost interest defeasance requirements are spelled out in the contract and can be quite complex fixed interest ratesin most cases borrowers are not personally responsible for failure to make payments | |
when a mortgaged property is sold the loan can be passed on to new buyers | high prepayment penalties to discourage borrowers from paying a loan early borrowers may be required to provide alternative collateral if they wish to pay a loan early | |
what is the difference between cmbs and rmbs | a residential mortgage backed security or rmbs is a security backed by a bundle of residential loans for homes or apartments a cmbs is backed by commercial real estate such as office buildings storefronts malls or other business spaces | |
what are the risks of a cmbs | the main risk for a cmbs investor is the possibility of a default in the underlying loans because these are non recourse loans the borrower cannot be held personally responsible if the loan defaults | |
what is the main benefit of a cmbs | for investors the main benefit of a cmbs is a reliable cash flow based on a fixed interest rate moreover prepayment penalties help discourage borrowers from early payments ensuring that the cash flow will continue for the full term of the loan the bottom linea commercial mortgage backed security cmbs is a type of security backed by a bundle of commercial real estate loans as borrowers make payments the money is used to repay investors of the cmbs | |
what is commercial paper | commercial paper is an unsecured short term debt instrument issued by corporations it s typically used to finance short term liabilities such as payroll accounts payable and inventories commercial paper involves a specific amount of money that is to be repaid by a specific date minimum denominations are 100 000 terms to maturity extend from one to 270 days they average 30 days investopedia madelyn goodnightunderstanding commercial papercommercial paper was first introduced during colonial times and was referred to as a bill of exchange they became more modern during the 1920s when new york merchants began to sell their short term obligations to dealers to access capital needed to cover near term obligations these dealers or middlemen purchased the paper also known as promissory notes at a discount from their par value they then sold the paper to banks and other investors the merchants would repay the investors an amount equal to the par value of the note 1commercial paper is not backed by any form of collateral making it an unsecured debt and will usually have a higher yield 2 it differs from asset backed commercial paper abcp a class of debt instrument backed by assets selected by the issuer in either case commercial paper is only issued by firms with high ratings from credit rating agencies 3 these firms can easily find buyers without having to offer a substantial discount at a higher cost to themselves for the debt issue commercial paper is issued by large institutions in denominations of 100 000 or more 2 other corporations financial institutions and wealthy individuals are usually buyers of commercial paper marcus goldman the founder of investment bank goldman sachs was the first dealer in the money market to purchase commercial paper his company became one of the biggest commercial paper dealers in america following the civil war 4types of commercial paperthere are a bunch of different types of commercial paper as companies can issue different forms of items depending on the criteria they re willing to commit to here are the main types of commercial paper promissory notes are written promises to pay a specific amount of money on a certain date they are used by companies to borrow funds without having to use any collateral and promissory notes can range from just a few days to up to a year promissory notes are sold at a discount from their face value and redeemed at face value upon maturity meaning the difference between those two amounts is technically the interest earned drafts are orders written by one party the drawer directing another party the drawee to pay a specified sum to a third party the payee the drawee is usually a bank as commercial paper drafts can be used in trade financing to facilitate the purchase of goods and services drafts can be either sight drafts which are payable on demand or time drafts which can be payable at a specific future date bankers acceptances are time drafts that have been accepted and guaranteed by a bank they are commonly used in international trade to ensure payment to exporters the bank s acceptance of the draft means that the bank promises to pay the face value of the draft at maturity which gives certain parties a level of security bankers acceptances can also be traded in the secondary market before maturity cds are time deposits issued by banks that pay a fixed interest rate for a specified period cds are considered low risk investments since they are backed by the issuing bank however there may be a dollar cap as to the amount that is insured while they are technically not unsecured like most commercial paper large denominations of cds are often included in the broader category of commercial paper because of their relative level of liquidity and short term nature assuming a more brief cd length repos are agreements in which one party sells securities to another with a promise to repurchase them at a specified price on a future date although repos are secured by the underlying securities they are frequently used as a form of short term borrowing in the money markets because a repo transaction includes the initial sale and the repurchase agreement it acts as a short term loan commercial paper termsthe issuer of commercial paper is the entity that is creating the short term debt to fund their short term cash needs as mentioned earlier most issuers are large corporations with strong credit as the issuer may demonstrate a high probability of being able to pay back debt especially in the short term the maturity of commercial paper designates how long the debt is outstanding for the issuer commercial paper often a term up to 270 days though companies often issue commercial paper with a maturity of 30 days 2 at the end of the maturity period the commercial paper is technically due and the issuer is now liable to return investor capital though they may choose to simply re issue more commercial paper commercial paper is often unsecured which means there is no collateral for the debt the issuing company is taking on if the issuing company goes bankrupt holders of the issuer s commercial paper may not have recourse in receiving funds the idea is because commercial paper s maturity is so short and the credit worthiness of issuers is higher the debt does not need backing by corporate assets commercial paper is issued at face value meaning a debt instrument has a value to it often in denominations of 100 000 2 instead of paying interest commercial paper is instead often issued at a discount or a price that less than face value when the commercial paper reaches maturity the investor will receive the face value amount of the instrument even though they paid a lower discount amount 5commercial paper is often tied to liquidity the measurement of well a company s short term cash flows will be able to cover its short term debt therefore issuers often create commercial paper to increase their liquidity as it may need cash in the short term on the other hand buyers of commercial paper may not need cash right away so they are willing to buy and hold the instrument to increase their cash on hand in the future commercial paper is just like bonds though each instrument has its own unique characteristics advantages and disadvantages of commercial papera major benefit of commercial paper is that it does not need to be registered with the securities and exchange commission sec as long as it matures in no more than nine months or 270 days 6this makes it a cost effective and simple means of financing although maturities can go as long as 270 days before coming under the purview of the sec maturities for commercial paper average about 30 days 7commercial paper is also easier to deal with compared to the effort time and money involved in getting a business loan it offers issuers the advantage of lower interest rates while it offers investors a low risk of default commercial paper provides an effective way for investors to diversify portfolios companies must have extremely good credit to issue commercial paper 3 so it doesn t offer access to capital for all institutions | |
what s more the proceeds from this type of financing can only be used on current assets or inventories they are not allowed to be used on fixed assets such as a new plant without sec involvement | low interest rates for issuers mean low rates of return for investors also due to the large minimum denomination of 100 000 commercial paper typically isn t directly available to smaller investors however they can invest indirectly through companies that buy commercial paper who issues commercial paper commercial paper is usually issued by large corporations with strong credit ratings the important part here is that commercial paper usually does not require collateral therefore in order to issue commercial paper these companies usually have to be in good standing with strong external relationships these types of companies can range across differing industries for example manufacturing companies may issue commercial paper as manufacturers require an influx of inventory as part of their business cycle they may not have enough capital on hand to buy goods they need which they ironically need in order to sell in order to raise capital issuing commercial paper gives these types of companies upfront capital they may need to kickstart revenue cycles note that commercial paper is useful here only if the company expects to convert the raw materials into revenue in a relatively short amount of time another type of issuer of commercial paper could be service providers in a similar example as above consider a consulting firm that provides legal services in order to generate income these firms have to pay staff however without upfront capital to pay staff the firms can t generate that income by issuing commercial paper these firms get the money upfront they need to drive revenue again just like with manufacturing companies the service provider should expect to be able to generate short term income to align with the commercial paper cycle who buys commercial paper commercial paper is primarily invested in by institutional investors due to its nature and characteristics these investors include money market funds that aim to maintain liquidity while earning a modest return money market funds prefer commercial paper due to its short maturity and relatively low risk fitting well within their investment strategies that emphasize safety and liquidity corporate treasurers also invest in commercial paper as part of their short term cash management strategies companies with excess cash often seek to park their funds in high quality short term instruments that can be quickly liquidated if needed instead of having corporate cash sit by the wayside not generating income corporations can buy commercial paper to generate revenue while not having to take on any substantial level of risk or sacrifice longer term corporate strategy pension funds insurance companies and other institutional investors with a mandate to manage large sums of money may also invest in commercial paper lastly banks and other financial institutions are usually also prominent investors in commercial paper they use it as part of their asset liability management strategies to match the durations of their assets and liabilities more effectively for instance if a bank has a number of short term liabilities coming due it can choose to maximize the efficiency of its capital by investing in commercial paper with the same maturity of that debt commercial paper vs bondsboth commercial paper and bonds are debt instruments however there are important differences between them that are useful to know commercial paper maturities extend from one to 270 days 2 bonds mature in one to 30 years 8 though a company may report part of its bonds as short term debt a majority of bonds are usually longer term compared to commercial paper commercial paper has no coupon payments everything is repaid at maturity with one payment 5 bonds pay interest at regular intervals twice a year over the life of the loan 8 though both instruments result in a return of capital at the maturity date of the instrument bonds also make payments along the way another potential difference between the two is the collateral requirements for long term bonds investors will often want security that if something were to happen they have the first right to claim company assets therefore many bonds may be secured while the riskiest bonds may more closely mirror commercial paper by being unsecured example of commercial paperlet s say a retail firm is looking for short term funding to finance some new inventory for an upcoming holiday season the firm needs 10 million it offers investors commercial paper with a face value of 10 1 million this is in line with prevailing interest rates | |
when the commercial paper matures investors in effect receive an interest payment of 100 000 along with the 10 million they loaned out this equates to an interest rate of 1 this interest rate can be adjusted for time contingent on the number of days the commercial paper is outstanding | say the term of the commercial paper is 30 days this means the firm will raise 10 million today and in 30 days it may repay 10 1 million to investors holding the commercial paper | |
is commercial paper a type of debt | yes commercial paper is short term unsecured debt issued by institutions who want to raise capital needed for a short amount of time it s an alternative to having to go through the effort and cost involved in getting a business loan who are the primary buyers of commercial paper due to the large minimum denominations usually 100 000 or more large institutions comprise the main buyers of commercial paper according to the sec these include investment companies retirement accounts state and local governments financial and non financial firms 2 | |
how do individuals invest in commercial paper | the minimum investment in commercial paper is usually 100 000 so the best way for smaller investors to invest in commercial paper is to put their money in the companies that buy it these include money market funds mutual funds and even exchange traded funds | |
what are the maturity periods for commercial paper | commercial paper typically has a maturity period ranging from one day to 270 days the most common maturities are 30 60 and 90 days by keeping the maturity period short issuers can reduce the risk of default and better manage their short term financing needs | |
what are the risks associated with commercial paper | even though the premise of commercial paper is a market with low risk participants the primary risk associated with commercial paper is still credit risk there will always be the possibility that the issuer may default on their repayment obligation since commercial paper is unsecured investors rely on the issuer s financial stability and credit rating the bottom linecommercial paper is unsecured debt with short terms up to 270 days issued by companies with high credit ratings it offers a less expensive way to raise money to pay short term expenses compared to getting a business loan commercial paper can also be attractive for issuers due to the low interest rate that s usually attached to it while that rate isn t always as appealing to investors it can be a higher return than that offered by some bonds such as treasuries plus it s an investment option that can help diversify portfolios investors in commercial paper are usually institutions rather than individuals due to the large minimum denominations involved commercial paper may be seen as a low risk investment due to the high credit rating preferred for issuers bear in mind however that like any other investment it involves some degree of risk | |
what is commercial real estate cre | commercial real estate cre is property used exclusively for business related purposes or to provide a workspace rather than a living space which would instead constitute residential real estate most often commercial real estate is leased to tenants to conduct income generating activities this broad category of real estate can include everything from a single storefront to a huge shopping center commercial real estate comes in a variety of forms it can be anything from an office building to a residential duplex or even a restaurant coffee shop or warehouse individuals companies and corporate interests can make money from commercial real estate by leasing it out or holding it and reselling it commercial real estate includes several categories such as retailers of all kinds office space hotels and resorts strip malls restaurants and healthcare facilities understanding commercial real estate cre commercial real estate and residential real estate comprise the two primary categories of real estate property residential properties include structures reserved for human habitation and not for commercial or industrial use as its name implies commercial real estate is used in commerce and multiunit rental properties that serve as residences for tenants are classified as commercial activity for the landlord commercial real estate is typically categorized into four classes depending on function individual categories may also be further classified there are for instance a number of different types of retail real estate similarly office space has several subtypes it is often characterized as class a class b or class c note that some zoning and licensing authorities further break out industrial properties sites used for the manufacture and production of goods especially heavy goods but most consider it a subset of commercial real estate commercial leasessome businesses own the buildings that they occupy however the more typical case is that the commercial property is leased usually an investor or a group of investors owns the building and collects rent from each business that operates there commercial lease rates the price to occupy a space over a stated period are customarily quoted in annual rental dollars per square foot conversely residential real estate rates quote as an annual sum or a monthly rent commercial leases will typically run from one year to 10 years or more with office and retail space typically averaging five to 10 year leases this can be contrasted with more short term yearly or month to month residential leases there are four primary types of commercial property leases each requiring different levels of responsibility from the landlord and the tenant managing commercial real estateowning and maintaining leased commercial real estate requires full and ongoing management by the owner property owners may wish to employ a commercial real estate management firm to help them find manage and retain tenants oversee leases and financing options and coordinate property upkeep and marketability the specialized knowledge of a commercial real estate management company is helpful as the rules and regulations governing such property vary by state county municipality industry and size the landlord must often strike a balance between maximizing rents and minimizing vacancies and tenant turnover turnover can be costly for cre owners because space must be adapted to meet the specific needs of different tenants for example if a restaurant is moving into a property once occupied by a yoga studio | |
how investors make money in commercial real estate | investing in commercial real estate can be potentially lucrative and serve as a hedge against the volatility of the stock market investors can make money through property appreciation when they sell but most returns come from tenant rents investors can use direct investments where they become landlords through the ownership of the physical property people best suited for direct investment in commercial real estate are those who either have a considerable amount of knowledge about the industry or can employ firms that do commercial properties are a high risk high reward real estate investment such an investor is likely to be a high net worth individual since cre investing requires a considerable amount of capital the ideal property is in an area with low cre supply and high demand which will give favorable rental rates the strength of the area s local economy also affects the value of the cre purchase alternatively investors may invest in the commercial market indirectly through either ownership of various market securities such as real estate investment trusts reits or exchange traded funds etfs that invest in commercial property related stocks or investment in companies that cater to the commercial real estate market such as banks and realtors advantages of commercial real estateone of the biggest advantages of commercial real estate is attractive leasing rates in areas where the amount of new construction is limited by either land or law commercial real estate can have impressive returns and considerable monthly cash flows industrial buildings generally rent at a lower rate though they also have lower overhead costs compared with an office tower commercial real estate also benefits from comparably longer lease contracts with tenants than residential real estate this long lease length gives the commercial real estate holder a considerable amount of cash flow stability as long as long term tenants occupy the building in addition to offering a stable and rich source of income commercial real estate offers the potential for capital appreciation as long as the property is well maintained and kept up to date and like all forms of real estate it is a distinct asset class that can provide an effective diversification option to a balanced portfolio disadvantages of commercial real estaterules and regulations are the primary deterrents for most people wanting to invest in commercial real estate directly the taxes mechanics of purchasing and maintenance responsibilities for commercial properties are buried in layers of legalese these requirements shift according to state county industry size zoning and many other designations most investors in commercial real estate either have specialized knowledge or a payroll of people who do another hurdle is the increased risk brought with tenant turnover especially relevant in an economy where unexpected retail closures leave properties vacant with little advance notice with residences the facilities requirements of one tenant usually mirror those of previous or future tenants however with a commercial property each tenant may have very different needs that require costly refurbishing the building owner then has to adapt the space to accommodate each tenant s specialized trade a commercial property with a low vacancy but high tenant turnover may still lose money due to the cost of renovations for incoming tenants for those looking to invest directly buying a commercial property is a much more costly proposition than a residential property moreover while real estate in general is among the more illiquid of asset classes transactions for commercial buildings tend to move especially slowly hedge against stock markethigh yielding source of incomestable cash flows from long term tenantscapital appreciation potentialmore capital required to directly investgreater regulationhigher renovation costsilliquid assetcommercial real estate and covid 19the global covid 19 pandemic beginning in 2020 did not cause real estate values to drop substantially except for an initial drop at the beginning of the pandemic property values have remained steady or even risen much like the stock market which recovered from its dramatic drop in the second quarter q2 of 2020 with an equally dramatic rally that ran through much of 2021 1this is a key difference between the economic fallout occurring in 2020 and what happened a decade earlier what is not known is if the required remote work environment that began in 2020 for most americans will have any long term impact on corporate office needs companies have begun to roll out hybrid solutions requiring employees to return to the office for example in may 2023 amazon required employees to begin returning back to physical offices at least three days each week 2 however the commercial real estate has still yet to fully recover consider how american tower corporation amt one of the largest united states reits was priced at roughly 250 per share in june 2022 fast forward one year the reit traded at roughly 187 per share in june 2023 3commercial real estate outlook and forecaststhe u s commercial property market took a big hit during the 2008 2009 recession but it has experienced consistent annual gains since 2010 these gains have helped recover the recession era losses most research maintained that the property market remains healthy overall j p morgan in its 2019 commercial real estate outlook largely echoed this view commenting that 2019 was the 10th year of increases in commercial property rents and valuations 4after major disruptions discussed above as part of the pandemic the commercial real estate is attempting to emerge from an unclear state according to j p morgan chase remote and hybrid work have largely reduced demand for office space b and c class office buildings may face more difficult prospects but a class spaces with long term leases of at least a decade seem to be more favorably positioned to recover 5for the most part cbre agrees in their 2023 forecast cbre stated it would be a year more favorable for tenants in addition less than 38 million square feet of of commercial office space is slated for delivery in 2023 down 27 from the average of the past five years these supply constraints appear due to developers hitting pause according to cbre 6 | |
what is the difference between commercial and residential real estate | residential real estate is used exclusively for private living quarters commercial real estate refers to any property used for business activities types of commercial real estate include hospitals assembly plants storage warehouses shopping centers office spaces or any other location for a business enterprise | |
is commercial real estate a good investment | it can be commercial real estate can have impressive returns and considerable monthly cash flows and returns stood up well during the market shocks of the past decade as with any investment however commercial real estate comes with risks | |
what are the disadvantages of commercial real estate | rules and regulations are the primary deterrents for most people wanting to invest in commercial real estate the taxes mechanics of purchasing and maintenance responsibilities for commercial properties are buried in layers of legalese and they can be difficult to understand without acquiring or hiring specialist knowledge the bottom linecommercial real estate refers to real estate that is used specifically for business or income generating purposes it differs from residential real estate because it has the potential to provide rental income as well as capital appreciation for investors the four main classes of commercial real estate are office space industrial multifamily rentals and retail investing in commercial real estate usually requires more sophistication and larger amounts of capital from investors than does residential real estate but it can offer high returns publicly traded reits are a feasible way for individuals to indirectly invest in commercial real estate without specialist knowledge of the sector | |
what is commercialization | commercialization is the process of bringing new products or services to market the broader act of commercialization entails production distribution marketing sales customer support and other key functions critical to achieving the commercial success of the new product or service typically commercialization occurs after a small business has grown and scaled its operations and reached levels that allow it to successfully reach a larger market for example if a small bakery is known for its cinnamon rolls and has sold them with great success it can commercialize its products by selling the packaged cinnamon rolls to local grocery stores where others can buy the pastries and the bakery can increase its sales by multiple factors understanding commercializationcommercialization requires a carefully developed three tiered product rollout and marketing strategy it encompasses the following major components many people view the ideation stage as the mouth of a funnel although many ideas enter the funnel top only a fraction ultimately make their way downward toward implementation ideation attempts to generate new products and services that meet unanswered consumer demands and the most functional designs align with the company s business model by offering high benefits at low cost the ideation stage strives to incorporate a marketing philosophy known as the four ps which stand for product price place and promotion often referred to as the marketing mix a company uses this concept to determine the products to create the price points at which to sell them the customer base it wishes to target and the marketing campaigns it will roll out to try to move merchandise off shelves for a potential product to be eligible for commercialization research and development r d efforts must telegraph a degree of public value that could potentially result in increased profitability for the company in the business process stage considerations are made in terms of feasibility costs and thinking through how a potential commercialization strategy could actually be rolled out that being said the stakeholder stage is typically bundled with thinking through who the target audiences and stakeholders for a commercialized product or service are for commercialization to truly succeed a company must satisfy both its customer and stakeholder needs patents trademark registrations and other legal measures must be undertaken to protect a product s intellectual rights before the product may be brought to market manufacturing may occur in house or it may be subcontracted to third party factories once a product line is complete promotional efforts then bring awareness to the target market which is accessed through distribution channels as well as partnerships with retailers although businesses that produce market and distribute products in house tend to reap higher profits because they don t have to share proceeds with intermediaries they also assume greater liability concerning production cost overages | |
when does commercialization occur | commercialization usually occurs after a small business has grown and scaled its operations and reached levels that allow it to successfully reach a larger market | |
what are the 3 tiers of commercialization | commercialization requires a carefully developed three tiered product rollout and marketing strategy | |
what is the legal process in commercialization | before a new product may be brought to market patents trademark registrations and other legal measures must be undertaken to protect the product s intellectual rights the bottom linecommercialization is the process of bringing new products or services to market on a broader scale commercialization involves production distribution marketing sales customer support and other key functions critical to achieving the commercial success of the new product or service | |
what is a commingled fund | a commingled fund is a fund that consists of a portfolio of assets from various accounts that are blended together commingled funds exist to reduce the costs of managing the constituent accounts separately commingled funds also referred to as institutional funds are a type of pooled fund that is not publicly listed or available to individual retail investors instead these are used by closed retirement plans pension funds insurance policies and other institutional accounts understanding a commingled fundcommingling involves the combining of assets of different investors into a single fund or investment vehicle commingling is a primary feature of most investment funds it may also be used to combine various types of contributions for various purposesin some ways commingled funds are similar to mutual funds both are professionally managed by one or more fund managers and can invest in basic financial instruments such as stocks bonds or a combination of both also like mutual funds commingled fund investments benefit from economies of scale which allow for lower trading costs per dollar of investment and diversification which lowers portfolio risk in other ways commingled funds are different from mutual funds there s no 12 b 1 marketing fee and often lower administration fees because they re not publicly marketed and the reporting requirements are different commingled funds are not regulated by the securities and exchange commission sec which means they are not required to submit a variety of lengthy disclosures mutual funds on the other hand must register with the sec and abide by the investment company act of 1940 commingled funds are not completely devoid of oversight though they are subject to review by the united states office of the comptroller of the currency as well as individual state regulators while mutual funds offer a prospectus commingled funds offer a summary plan description spd spds can offer more detail describing the fund s objectives investment strategy and background of its managers it also describes the rights and obligations of the plan participants and beneficiaries any participant in a plan offering a commingled fund should read the spd carefully to learn how a commingled fund performs on a day to day or quarterly basis you ll most likely have to contact your company retirement plan s information center for an update advantages and disadvantages of commingled fundsless regulation can result in fewer legal expenses and operating costs for a commingled fund the lower the costs the less drag on a fund s returns if a commingled fund and a comparable mutual fund post the exact same gross performance the commingled fund s net return would likely be better because its expenses were lower than the mutual fund s a disadvantage of commingled funds is that they do not have ticker symbols and are not publicly traded this lack of public information can make it difficult for outside investors to track the fund s capital gains dividends and interest income with publicly traded mutual funds this information is required to be transparent professionally manageddiversified portfoliolower fees and expenses than mutual fundseconomies of scaleilliquidless transparent harder to tracknot sec regulatedlimited availabilityexample of a commingled fundthe fidelity contrafund commingled pool is available to companies with qualified employee benefit plans 1like a mutual fund it has a portfolio manager and publicly discloses pertinent information via quarterly reports it focuses on large cap growth stocks with major weightings in information technology communication services consumer discretionary financial companies and health care unlike a mutual fund it isn t available to the public at large 1the contrafund commingled pool has a 0 43 expense ratio since its inception in 2014 the fund has delivered an annualized return of 14 69 versus the 12 96 produced by the s p 500 index 1special considerationsin some cases the commingling of funds may be illegal this usually occurs when an investment manager combines client money with their own or their firm s in violation of a contract details of an asset management agreement are typically outlined in an investment management contract an investment manager has a fiduciary responsibility to manage assets according to certain specifications and standards assets agreed to be managed as separate cannot be commingled by the investment advisor other legal situations may also arise where contributions provided by a client must be managed with special care this can occur in legal cases corporate client accounts and real estate transactions | |
what types of commingled funds are there | types of commingled funds can include equity fixed income and alternative investment funds the last of these might have hedge funds derivative investments and private equity investments in its portfolio can anyone invest in a commingled fund normally no the typical investor is an institutional investor individuals usually can t put their money into a commingled fund unless they re a high net worth accredited investor | |
where do i get information about a commingled fund | usually from your employer if your workplace retirement plan invests in commingled funds typically you won t find public sources such as newspapers providing information on them because they aren t publicly traded investment vehicles some investment companies may offer quarterly and annual reviews of performance the bottom linea commingled fund is money pooled from various institutional investors that is managed by investment professionals it isn t regulated by the sec generally it is an investment opportunity not available to the general public except through their employer s workplace retirement plan some administrative expenses can be lower than those of mutual funds due to its simpler reporting and disclosure requirements and the lack of need for marketing | |
what is a commission | a commission is a service charge assessed by a broker or investment advisor for providing investment advice or handling purchases and sales of securities for a client there are important differences between commissions and fees at least in the way these words are used to describe professional advisors in the financial services industry a commission based advisor or broker makes money by selling investment products such as mutual funds and annuities and conducting transactions with the client s money a fee based advisor charges a flat rate for managing a client s money this may be either a dollar amount or a percentage of assets under management aum sales between family members are often gifts of equity which are not commission based understanding commissionsfull service brokerages derive much of their profit from charging commissions on client transactions commissions vary widely from brokerage to brokerage and each has its own fee schedule for various services when determining the gains and losses from selling a stock it s important to factor in the cost of commissions in order to be completely accurate commissions can be charged if an order is filled canceled or modified and even if it expires in most situations when an investor places a market order that goes unfilled no commission is charged however if the order is canceled or modified the investor may find extra charges added to the commission limit orders that go partially filled often will incur a fee sometimes on a prorated basis today most online brokers no longer charge commission for buying and selling stocks commission costscommissions can eat into an investor s returns suppose susan buys 100 shares of conglomo corp for 10 each her broker charges a 2 5 commission on the deal so susan pays 1 000 for the shares plus 25 six months later her shares have appreciated 10 and susan sells them her broker charges a 2 commission on the sale or 22 susan s investment earned her a 100 profit but she paid 47 in commissions on the two transactions her net gain is only 53 many online brokerages offer flat rate commissions such as 4 95 per trade but note however that there is an increasing trend for online brokers to offer commission free trading in many stocks and etfs for this reason online discount brokerages and roboadvisors are gaining popularity in the 21st century these services provide access to stocks index funds exchange traded funds etfs and more on a user friendly platform for self directed investors most charge a flat fee for trades commonly between 0 25 and 0 50 per year of assets managed online brokerage services also provide a wealth of financial news and information but little or no personalized advice this can prove troublesome for some rookie investors commissions vs feesfinancial advisors often advertise themselves as being fee based rather than commission based a fee based advisor charges a flat rate for managing a client s money regardless of the type of investment products the client ends up purchasing this flat rate will be either a dollar amount or a percentage of assets under management aum a commission based advisor derives income from selling investment products such as mutual funds and annuities and conducting transactions with the client s money thus the advisor gets more money by selling products that offer higher commissions such as annuities or universal life insurance and by moving the client s money around more frequently a professional advisor has a fiduciary responsibility to offer the investments that best serve the client s interests that said a commission based advisor may try to steer clients toward investment products that pay generous commissions as opposed to those that actually benefit the client | |
what are commodities | commodities are raw materials used to manufacture consumer products they are inputs in the production of other goods and services rather than finished goods sold to consumers in commerce commodities are basic resources that are interchangeable with other goods of the same type the quality of a given commodity may differ slightly but it is essentially uniform across producers when traded on an exchange commodities must also meet specified minimum standards also known as a basis grade investopedia joules garciaunderstanding commoditiescommodities are the raw inputs used in the production of goods they may also be basic staples such as certain agricultural products the important feature of a commodity is that there is very little differentiation in that good regardless of who produces it a barrel of oil is basically the same product regardless of the producer the same goes for a bushel of wheat or a ton of ore by contrast the quality and features of a given consumer product will often be quite different depending on the producer e g coke vs pepsi 1some traditional examples of commodities include grains gold beef oil and natural gas more recently the definition has expanded to include financial products such as foreign currencies and indexes commodities can be bought and sold on specialized exchanges as financial assets there are also well developed derivatives markets whereby you can buy contracts on such commodities e g oil forwards wheat or gold futures and natural gas options some experts believe that investors should hold at least some portion of a well diversified portfolio in commodities since they are not highly correlated with other financial assets and may serve as an inflation hedge 2you might consider allocating up to 10 of your portfolio to a mix of commodities ordinary investors can look to one of several commodities etfs or mutual funds to gain exposure buyers and producers of commoditiesthe sale and purchase of commodities are usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded for example the chicago board of trade cbot stipulates that one wheat contract is for 5 000 bushels and states what grades of wheat can be used to satisfy the contract 3two types of traders trade commodity futures the first are buyers and producers of commodities that use commodity futures contracts for the hedging purposes for which they were originally intended these traders make or take delivery of the actual commodity when the futures contract expires for example the wheat farmer who plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested the farmer can sell wheat futures contracts when the crop is planted and have a guaranteed predetermined price for the wheat when it is harvested commodities speculatorsthe second type of commodities trader is the speculator these are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements these traders never intend to make or take delivery of the actual commodity when the futures contract expires many futures markets are very liquid and have a high degree of daily range and volatility making them very tempting markets for intraday traders many index futures are used by brokerages and portfolio managers to offset risk also since commodities do not typically trade in tandem with equity and bond markets some commodities can be used effectively to diversify an investment portfolio special considerationscommodity prices typically rise when inflation accelerates which is why investors often flock to them for their protection during times of increasing inflation particularly when it is unexpected so commodity demand increases because investors flock to them raising their prices the prices of goods and services then go up to match the increase this causes commodities to often serve as a hedge against a currency s decreased buying power when the inflation rate increases 45 | |
what is the relationship between commodities and derivatives | the modern commodities market relies heavily on derivative securities such as futures and forward contracts buyers and sellers can transact with one another easily and in large volumes without needing to exchange the physical commodities themselves many buyers and sellers of commodity derivatives do so to speculate on the price movements of the underlying commodities for purposes such as risk hedging and inflation protection | |
what determines commodity prices | like all assets commodity prices are ultimately determined by supply and demand for example a booming economy might lead to increased demand for oil and other energy commodities supply and demand for commodities can be impacted in many ways such as economic shocks natural disasters and investor appetite investors may purchase commodities as an inflation hedge if they expect inflation to rise | |
what is the difference between a commodity and a security or asset | commodities are physical products that are meant to be consumed or used in the production process assets on the other hand are goods that are not consumed through their use for instance money or a piece of machinery are used for productive purposes but persist as they are used a security is a financial instrument that is not a physical product it is a legal representation e g a contract or claim that represents certain cash flows generated from various activities such as a stock representing the future cash flows of a business | |
what are the types of commodities | hard commodities are usually classified as those that are mined or extracted from the earth these can include metals ore and petroleum energy products soft commodities instead refer to those that are grown such as agricultural products these include wheat cotton coffee sugar soybeans and other harvested items | |
where are commodities traded | the major u s commodity exchanges are ice futures u s and the cme group which operate four major exchanges the chicago board of trade cbot the chicago mercantile exchange cme the new york mercantile exchange nymex and the commodity exchange inc comex there are also major commodities exchanges located around the world the bottom linecommodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another examples of commodities include barrels of oils bushels of wheat or megawatt hours of electricity commodities have long been an important part of commerce but in recent decades commodities trading has become increasingly standardized | |
what is a commodity futures contract | a commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future commodity futures can be used to hedge or protect an investment position or to bet on the directional move of the underlying asset many investors confuse futures contracts with options contracts with futures contracts the holder has an obligation to act unless the holder unwinds the futures contract before expiration they must either buy or sell the underlying asset at the stated price commodity futures can be contrasted with the spot commodities market | |
how a commodity futures contract works | most commodity futures contracts are closed out or netted at their expiration date the price difference between the original trade and the closing trade is cash settled commodity futures are typically used to take a position in an underlying asset typical assets include commodity futures contracts are called by the name of their expiration month meaning a contract ending in september is a september futures contract some commodities can have a significant amount of price volatility or price fluctuations as a result there s the potential for large gains but large losses as well commodity futures and commodity forward contracts are functionally similar the major difference is that futures are traded on regulated exchanges and have standardized contract terms forwards instead trade over the counter otc and have customizable terms speculating with commodity futures contractscommodities futures contracts can be used by speculators to make directional price bets on the underlying asset s price positions can be taken in either direction meaning investors can go long or buy as well as go short or sell the commodity commodity futures use a high degree of leverage so that the investor doesn t need to put up the total amount of the contract instead a fraction of the total trade amount must be placed with the broker handling the account the amount of leverage needed can vary given the commodity and the broker as an example let s say an initial margin amount of 3 700 allows an investor to enter into a futures contract for 1 000 barrels of oil valued at 45 000 with oil priced at 45 per barrel if the price of oil is trading at 60 at the contract s expiry the investor has a 15 gain or a 15 000 profit the trades would settle through the investor s brokerage account crediting the net difference of the two contracts most futures contracts will be cash settled but some contracts will settle with the delivery of the underlying asset to a centralized processing warehouse considering the significant amount of leverage with futures trading a small move in the price of a commodity could result in large gains or losses compared to the initial margin speculating on futures is an advanced trading strategy and not fit for the risk tolerance of most investors unlike options futures are the obligation of the purchase or sale of the underlying asset as a result failure to close an existing position could result in an inexperienced investor taking delivery of a large number of unwanted commodities trading in commodity futures contracts can be very risky for the inexperienced the high degree of leverage used with commodity futures can amplify gains as well as losses if a futures contract position is losing money the broker can initiate a margin call which is a demand for additional funds to shore up the account the broker will usually have to approve an account to trade on margins before it can enter into contracts hedging with commodity futures contractsanother reason to enter the futures market is to hedge the price of a commodity businesses use futures to lock in prices of the commodities they sell or use in production the goal of hedging is to prevent losses from potentially unfavorable price changes rather than to speculate many companies that hedge use or produce the underlying asset of a futures contract examples include farmers oil producers livestock breeders and manufacturers for example a plastics producer could use commodity futures to lock in a price for buying natural gas by products needed for production at a date in the future the price of natural gas like all petroleum products can fluctuate considerably leaving an unhedged plastics producer at risk of cost increases in the future if a company locks in the price and the price increases the manufacturer would have a profit on the commodity hedge the profit from the contract would offset the increased cost of purchasing the product alternatively the company could take delivery of the product at a cheaper fixed price hedging a commodity can lead to a company missing out on favorable price moves since the contract is locked in at a fixed rate regardless of where the commodity s price trades afterward also if the company miscalculates its needs for the commodity and over hedges it could lead to having to unwind the futures contract for a loss when selling it back to the market leveraged margin accounts only require a fraction of the total contract amount deposited initially speculators and companies can trade both sides of the market companies can hedge the price of necessary commodities and control costs the high degree of leverage can amplify losses and lead to margin calls and significant losses hedging a commodity can lead to a company missing out on favorable price moves since the contract is fixed if a company over hedges a commodity it can lead to losses from unwinding the contract example of commodity futuresbusiness owners can use commodity futures contracts to fix the selling prices of their products weeks months or years in advance for example let s say a farmer expects to produce 1 000 000 bushels of soybeans in the next 12 months typically soybean futures contracts include the quantity of 5 000 bushels the farmer s break even point on a bushel of soybeans is 10 per bushel meaning 10 is the minimum price needed to cover the costs of producing the soybeans the farmer sees that a one year futures contract for soybeans is currently priced at 15 per bushel the farmer decides to lock in the 15 selling price per bushel by selling enough one year soybean contracts to cover the harvest the farmer needs 200 futures contracts 1 000 000 bushels needed 5 000 bushels per contract 200 contracts one year later regardless of price the farmer delivers the 1 000 000 bushels and receives the locked in price of 15 x 200 contracts x 5000 bushels or 15 000 000 in total income unless soybeans were priced at 15 per bushel in the market on the expiration date the farmer had either gotten paid more than the prevailing market price or missed out on higher prices if soybeans were priced at 13 per bushel at expiry the farmer s 15 hedge would be 2 per bushel higher than the market price for a gain of 2 000 000 on the other hand if soybeans were trading at 17 per bushel at expiry the 15 selling price from the contract means the farmer would have missed out on an additional 2 per bushel profit | |
how to trade commodity futures | these days trading commodity futures online is a straightforward process that said you should do plenty of due diligence before jumping in here are a few steps to take to help you get started | |
when you start out try to use small amounts and only make one trade at a time if possible don t overwhelm yourself overtrading can cause you to take on far more risk than you can handle | the commodity futures trading commission cftc commodity futures contracts and their trading are regulated in the u s by the commodity futures trading commission cftc a federally mandated u s regulatory agency established by the commodity futures trading commission act of 1974 1the cftc regulates the commodity futures and options markets its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation abusive trade practices and fraud commodity futures faqscommodity futures contracts are standardized to facilitate trading on an exchange but while they re easily transferable the obligation within the contract remains valid both forward contracts and futures contracts are agreements to buy or sell an asset at a predetermined price at a specific date thus commodity brokers use them primarily to mitigate the risk of fluctuating prices by locking in a price beforehand the irs requires a specific form when reporting gains and losses from commodity futures contracts form 6781 the irs considers commodities and futures transactions as 1256 contracts the commodity futures modernization act cfma signed into law on december 21 2000 is u s federal legislation stating that over the counter otc derivatives would remain unregulated 2 | |
what is a commodity trading advisor cta | a commodity trading advisor cta is an individual or firm that provides personalized advice regarding the buying and selling of futures contracts options on futures and retail off exchange forex contracts or swaps advisors who give such advice are required to be registered as a cta by the national futures association nfa the self regulatory organization for the derivatives industry understanding a commodity trading advisor cta in 1922 the grain futures act was passed regulating futures trading it was later replaced by the commodity exchange act of 1936 which further regulated commodities and futures trading and required certain trading to be done on exchanges 2the commodity futures trading commission act of 1974 was enacted to amend the commodity exchange act it created the commodity futures trading commission cftc and marked the first use of the term commodity trading advisor cta 3investing in commodities often involves the use of significant leverage and therefore requires a higher level of expertise to trade properly to avoid the potential for large losses the cftc has gradually expanded the requirements for cta registration over time it established the nfa to handle cta registration and ensure that registered members complied with cftc regulations and nfa rules 1a cta is a financial advisor who provides advice specifically related to commodities trading to obtain the cta registration applicants must meet certain proficiency requirements including passing the series 3 national commodity futures exam certain criteria if met can exempt advisors from cta registration 45the great salad oil swindle of 1963 led to the bankruptcy of 16 firms including two wall street brokerages and a subsidiary of american express it sparked a cry for tighter regulation of the commodity futures markets 6exemptions from registrationregistration as a cta by the national futures association is required for individuals or firms that provide advice on commodities trading unless one of the following criteria is met requirementsgenerally cta registration is required for principals of a firm as well as all employees who take orders from or give advice to the public ctas are required to provide advice regarding all forms of commodity investments including futures contracts forwards options and swaps 7cta funda cta fund is a hedge fund that uses a managed futures strategy it invests in futures contracts and uses a variety of trading strategies these may include systematic trading and trend following however fund managers can actively manage investments using discretionary strategies as well cta funds offering a managed futures strategy must be registered with the cftc and nfa | |
what s a commodity trading advisor | a commodity trading advisor or cta is a person or firm that advises clients in the use of derivatives as investments ctas are required to be registered by the national futures association the industry s independent self regulatory organization | |
what are futures contracts | futures contracts are a type of derivative they involve a standardized contract to buy or sell a certain security at a specific price and at a specified time in the future futures are used by investors to hedge the value of securities they have positions in and to speculate on price movements | |
what is the national futures association | the national futures association nfa is the derivative industry s sole self regulatory organization it was established by the commodity futures trading commission to conduct the registration of commodity trading advisors as part of its goal to protect the interests of the investing public it also monitors the actions of ctas to ensure that they follow its rules | |
what is common equity tier 1 cet1 | common equity tier 1 cet1 is a component of tier 1 capital and comprises primarily of common stock held by a bank or other financial institution cet1 is a capital measure that was introduced in 2014 as a precautionary way to protect the economy from a financial crisis 1 banks are expected to meet the minimum cet1 ratio requirements to their risk weighted assets rwas as outlined by their financial regulators understanding common equity tier 1 cet1 the basel committee formulated a reformed set of international standards to review and monitor banks capital adequacy following the 2007 2008 financial crisis these standards which are collectively called basel iii compare a bank s assets with its capital to determine if the bank could stand the test of a crisis 2capital is required by banks to absorb unexpected losses that arise during the normal course of the bank s operations the basel iii framework tightens capital requirements by limiting the type of capital that a bank may include in its different capital tiers and structures 3a bank s capital structure consists of several tiers these include 4common equity tier 1 is the highest quality of regulatory capital as it absorbs losses immediately when they occur according to the bank of international settlements a bank s tier 1 capital must include a minimum ratio of 4 5 of cet1 to its rwas 5cet1 is a measure of bank solvency that gauges a bank s capital strength 6special considerationsa bank s capital structure consists of lower tier 2 upper tier 1 at1 and cet1 cet1 is at the bottom of the capital structure which means that any losses incurred are first deducted from this tier in the event of a crisis 5 if the deduction results in the cet1 ratio dropping below its regulatory minimum the bank must build its capital ratio back to the required level or risk being overtaken or shut down by regulators during the rebuilding phase regulators may prevent the bank from paying dividends or employee bonuses 7 in the case of insolvency the equity holders bear the losses first 8the european banking authority conducts stress tests using the cet1 ratio from time to time to understand how much capital banks would have left in the adverse event of a financial crisis the results of these tests have shown that most banks would be able to survive a crisis 9calculating cet1 capitaltier 1 capital is calculated as common equity tier 1 capital plus additional tier 1 capital cet1 comprises a bank s core capital and includes common shares stock surpluses resulting from the issue of common shares retained earnings common shares issued by subsidiaries and held by third parties and accumulated other comprehensive income aoci 5additional tier 1 capital is defined as instruments that are not common equity but are eligible for inclusion in this tier 5 an example of at1 capital is a contingent convertible or hybrid security which has a perpetual term and can be converted into equity when a trigger event occurs an event that causes a security to be converted to equity occurs when cet1 capital falls below a certain threshold this measure is better captured by the cet1 ratio which measures a bank s capital against its assets because not all assets have the same risk the assets acquired by a bank are weighted based on the credit risk and market risk that each asset presents for example a government bond may be characterized as a no risk asset and given a zero percent risk weighting on the other hand a subprime mortgage may be classified as a high risk asset and weighted 65 according to basel iii capital and liquidity rules all banks must have a minimum cet1 to rwas ratio of 4 5 10 | |
how are tier 1 capital and cet1 capital different | cet1 capital is one component of total tier 1 capital the other is known as additional tier 1 capital at1 at1 cet1 tier 1 capital | |
what is the minimum tier 1 capital a bank can have | the basel accords spelled out the minimum capital requirements for banks they must maintain a minimum capital ratio of 8 of which 6 must be tier 1 capital 11 | |
what does a low cet1 ratio mean | a low cet1 ratio implies an insufficient level of tier 1 capital in such a case a bank may not be able to absorb a financial shock and may need to be bailed out quickly in the event of a financial crisis the bottom linecommon equity tier 1 cet1 is a component of tier 1 capital covering bank holdings such as cash and stock it is the highest quality of regulatory capital and banks are expected to meet minimum cet1 ratios as established by financial regulators any losses incurred by banks during a crisis are first deducted from cet1 | |
what is common law | common law is a body of unwritten laws based on legal precedents established by the courts common law influences the decision making process in unusual cases where the outcome cannot be determined based on existing statutes or written rules of law the u s common law system evolved from a british tradition that spread to north america during the 17th and 18th century colonial period common law is also practiced in australia canada hong kong india new zealand and the united kingdom 1investopedia nono floresunderstanding common lawa precedent known as stare decisis is a history of judicial decisions which form the basis of evaluation for future cases common law also known as case law relies on detailed records of similar situations and statutes because there is no official legal code that can apply to a case at hand the judge presiding over a case determines which precedents apply to that particular case the example set by higher courts is binding on cases tried in lower courts this system promotes stability and consistency in the u s legal justice system however lower courts can choose to modify or deviate from precedents if they are outdated or if the current case is substantially different from the precedent case lower courts can also choose to overturn the precedent but this rarely occurs investopedia sabrina jiangcommon law vs civil lawcivil law is a comprehensive codified set of legal statutes created by legislators a civil system clearly defines the cases that can be brought to court the procedures for handling claims and the punishment for an offense judicial authorities use the conditions in the applicable civil code to evaluate the facts of each case and make legislative decisions while civil law is regularly updated the goal of standardized codes is to create order and reduce biased systems in which laws are applied differently from case to case common law draws from institutionalized opinions and interpretations from judicial authorities and public juries similar to civil law the goal of common law is to establish consistent outcomes by applying the same standards of interpretation in some instances precedent depends on the case by case traditions of individual jurisdictions as a result elements of common law may differ between districts 2common law marriagea common law marriage also known as a non ceremonial marriage is a legal framework that may allow couples to be considered married without having formally registered their union as either a civil or religious marriage while common law is not common among the u s there are a number of states that have statutes or allow for common law marriage if they meet certain requirements a number of states including alabama recently abolished the statutes allowing for common law marriage 3special considerationsas judges present the precedents which apply to a case they can significantly influence the criteria that a jury uses to interpret a case historically the traditions of common law have led to unfair marginalization or disempowerment of certain groups whether they are outdated or biased past decisions continue to shape future rulings until societal changes prompt a judicial body to overturn the precedent this system makes it difficult for marginalized parties to pursue favorable rulings until popular thought or civil legislation changes the interpretation of common law feminists in the 19th and early 20th centuries who fought for women s rights often faced such difficulties for example in england common law as late as the 1970s held that when couples divorced fathers rather than mothers were entitled to custody of the children a bias that in effect kept women trapped in marriages example of common lawfrom time to time common law has furnished the basis for new legislation to be written for example the u k has long had a common law offense of outraging public decency in the last decade the authorities have used this ancient common law to prosecute a new intrusive activity called upskirting the practice of sticking a camera in between a person s legs without their consent or knowledge to take a photo or video of their private parts for sexual gratification or to humiliate or distress in february 2019 the u k parliament passed the voyeurism offences act that officially makes upskirting a crime punishable by up to two years in prison and the possibility of placing a convicted individual on the sex offenders register 4common law faqscommon law is a body of unwritten laws based on legal precedents established by the courts today the us operates under a dual system of both common and civil law the courts for example operate under common law the concept of common law marriage which acknowledges similar rights as those that have a marriage license to couples that are not officially married if several conditions are met is one example of common law in action today common law places an emphasis on precedent while allowing some freedom for interpretation the value of a common law system is that the law can be adapted to situations that were not contemplated at that time by the legislature us common law originates from medieval england however today both the us and uk operate under a dual system of both common and civil law 1the bottom linealthough common law is derived from its original appearance in medieval england it is still very much in effect in the us and elsewhere today as the evolution of technology and its presence in our lives continues to grow common law s ability to leave the legal code open for interpretation will become increasingly important 1 | |
what is a common size financial statement | a common size financial statement displays items as a percentage of a common base figure total sales revenue for example this type of financial statement allows for easy analysis between companies or between periods for the same company however if the companies use different accounting methods any comparison may not be accurate investopedia paige mclaughlinunderstanding common size financial statementswhile most firms do not report their statements in common size format it is beneficial for analysts to do so to compare two or more companies of differing size or different sectors of the economy formatting financial statements in this way reduces bias that can occur and allows for the analysis of a company over various periods this analysis reveals for example what percentage of sales is the cost of goods sold and how that value has changed over time common size financial statements commonly include the income statement balance sheet and cash flow statement common size financial statements reduce all figures to a comparable figure such as a percentage of sales or assets each financial statement uses a slightly different convention in standardizing figures common size financial statements make it easier to determine what drives a company s profits and to compare the company to similar businesses the balance sheet provides a snapshot overview of the firm s assets liabilities and shareholders equity for the reporting period a common size balance sheet is set up with the same logic as the common size income statement the balance sheet equation is assets equals liabilities plus stockholders equity the balance sheet thus represents a percentage of assets another version of the common size balance sheet shows asset line items as a percentage of total assets liabilities as a percentage of total liabilities and stockholders equity as a percentage of total stockholders equity the cash flow statement provides an overview of the firm s sources and uses of cash the cash flow statement is divided among cash flows from operations cash flows from investing and cash flows from financing each section provides additional information about the sources and uses of cash in each business activity one version of the common size cash flow statement expresses all line items as a percentage of total cash flow the more popular version expresses cash flow in terms of total operational cash flow for items in cash flows from operations total investing cash flows for cash flows from investing activities and total financing cash flows for cash flows from financing activities the income statement also referred to as the profit and loss p l statement provides an overview of flows of sales expenses and net income during the reporting period the income statement equation is sales minus expenses and adjustments equals net income this is why the common size income statement defines all items as a percentage of sales the term common size is most often used when analyzing elements of the income statement but the balance sheet and the cash flow statement can also be expressed as a common size statement real world example of a common size income statementfor example if a company has a simple income statement with gross sales of 100 000 cost of goods sold of 50 000 taxes of 1 000 and net income of 49 000 the common size statement would read as follows | |
what is a common size income statement | a common size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales it is used for vertical analysis in which each line item in a financial statement is represented as a percentage of a base figure within the statement 1common size financial statements help to analyze and compare a company s performance over several periods with varying sales figures the common size percentages can be subsequently compared to those of competitors to determine how the company is performing relative to the industry investopedia jake shi | |
how the common size income statement is used | generally accepted accounting principles gaap are based on consistency and comparability of financial statements a common size income statement makes it easier to see what s driving a company s profits the common size percentages also help to show how each line item or component affects the financial position of the company as a result the financial statement user can more easily compare the financial performance to the company s peers by analyzing how a company s financial results have changed over time common size financial statements help investors spot trends that a standard financial statement may not uncover the common size percentages help to highlight any consistency in the numbers over time whether those trends are positive or negative large changes in the percentage of revenue as compared to the various expense categories over a given period could be a sign that the business model sales performance or manufacturing costs are changing common size financial statement analysis can also be applied to the balance sheet and the statement of cash flows common size income statements with easy to read percentages allow for more consistent and comparable financial statement analysis over time and between competitors example of a common size income statementthe standard figure used in the analysis of a common size income statement is total sales revenue the common size percentages are calculated to show each line item as a percentage of the standard figure or revenue 1it s important to note that the common size calculation is the same as calculating a company s margins the net profit margin is simply net income divided by sales revenue which happens to be a common size analysis the same goes for calculating the gross margin sales revenue minus the cost of goods sold divided by sales revenue and operating margin gross profit minus selling general administrative expenses divided by sales revenue for example company a has an income statement with the above line items revenue cost of goods sold cogs selling general administrative expenses s ga taxes and net income net income is calculated by subtracting cogs s ga expenses and taxes from revenue if revenue is 100 000 cogs is 50 000 and s ga is 10 000 then gross profit is 50 000 operating profit is 40 000 and net income is 31 600 taxes at 21 the common size version of this income statement divides each line item by revenue or 100 000 revenue divided by 100 000 is 100 cogs divided by 100 000 is 50 operating profit divided by 100 000 is 40 and net income divided by 100 000 is 32 as we can see gross margin is 50 operating margin is 40 and the net profit margin is 32 the common size income statement figures | |
common stock is not just a piece of paper or these days a digital entry but a ticket to ownership in a company when you hold common stock you get to weigh in on corporate decisions by voting for the board of directors and corporate policies over the long term this type of equity can offer attractive returns but remember this comes with a catch if a company has to liquidate its assets common stockholders are at the back of the line getting paid only after bondholders preferred shareholders and other creditors have gotten their share | the value of common stock issued is reported in the stockholder s equity section of a company s balance sheet common stock explainedcommon stock is primarily a form of ownership in a corporation representing a claim on part of the company s assets and earnings if you re a shareholder this makes part owner but this doesn t mean you own the company s physical assets like chairs or computers those are owned by the corporation itself a distinct legal entity instead as a shareholder you own a residual claim to the company s profits and assets which means you are entitled to what s left after all other obligations are met traded on exchanges common stock can be bought and sold by investors or traders and common stockholders are entitled to dividends when the company s board of directors declares them typically they are paid out of a company s earnings and the decision to distribute them is made by the board taking into account factors like company performance future capital requirements and broader financial goals 1the first ever common stock was issued in 1602 by the dutch east india company and traded on the amsterdam stock exchange 2 over the following four centuries years stock markets have been created worldwide with major exchanges like the london stock exchange and the tokyo stock exchange listing tens of thousands of companies larger u s based stocks are traded on a public exchange such as the new york stock exchange nyse or nasdaq as of mid 2024 the nasadaq had some 3 377 listings but the nyse the largest in the world by market cap 34 smaller companies that can t meet the listing requirements of these major exchanges are considered unlisted and their stocks are traded over the counter | |
what is preferred stock | preferred stock is a distinct class of stock that provides different rights compared with common stock while both types confer ownership in a company preferred stockholders have a higher claim to the company s assets and dividends than common stockholders 5 this elevated status is reflected in the name preferred stock common stock vs preferred stockcommon and preferred stock both let investors own a stake in a business but there are key differences that investors need to understand shareholders in a company have the right to vote on important decisions regarding the company s management for example shareholders vote on the members of the board of directors usually common stock allows the shareholder to vote but preferred stock often does not confer voting rights 6both common and preferred stockholders can receive dividends from a company however preferred stock dividends are specified in advance based on the share s par or face value and the dividend rate of the stock businesses can choose whether or not and how much to pay in dividends to common stockholders | |
should a company not have enough money to pay all stockholders dividends preferred stockholders have priority over common stockholders and get paid first 5 for holders of cumulative preferred stock any skipped dividend payments accumulate as dividends in arrears and must be paid before dividends are issued to common stockholders | common stock and preferred stock trade on the open market investors can choose to purchase or sell either type of share however investors generally trade common stocks rather than preferred stocks due to their fixed dividends and lower risk profile preferred stocks typically have less price volatility and greater growth potential than common stocks because of their stable dividends and lower volatility preferred stocks are often favored by institutional investors pursuing a predictable income stream these stocks are also normally less liquid than common stocks meaning they are traded less frequently making them less suitable for retail investors looking for short term gains for common stock when a company goes bankrupt the common stockholders do not receive their share of the assets until after creditors bondholders and preferred shareholders this makes common stock riskier than debt or preferred shares 7the upside to common shares is they usually outperform bonds and preferred shares in the long run most companies issue all three types of securities for example wells fargo company has several bonds available on the secondary market preferred stock such as its series l wfc l and common stock wfc 89for a company to issue stock it initiates an initial public offering ipo an ipo is a major way for a company seeking additional capital to expand the enterprise to begin the ipo process a company works with an underwriting investment bank to determine the type and price of the stock once the ipo is complete the stock becomes available for purchase by the general public on the secondary market advantages and disadvantagesboth common stock and preferred stock have pros and cons for investors to consider pros and cons of common stockmore frequently traded than preferred stockhigher potential returnsvoting rightsmay not receive dividendslower priority to receive dividends or in the event of bankruptcymore price volatilitypros and cons of preferred stockhigher priority to receive dividendsless price volatilityfixed dividends that won t decreasemay lack voting rightslower potential returnstraded less frequently | |
how to invest in common stock | stocks should be considered an important part of any investor s portfolio they carry greater risk than assets like cds preferred stocks and bonds however the greater risk comes with a higher potential for rewards over the long term stocks tend to outperform other investments but in the short term have more volatility 10investors can choose from different kinds of common stock growth stocks belong to companies expected to experience increasing earnings which raises their share value meanwhile value stocks are priced lower relative to their fundamentals and often pay dividends unlike growth stocks stocks are also classified by market capitalization into large mid and small cap categories large cap stocks are more frequently traded and usually represent well established stable companies in contrast small cap stocks often belong to newer growth oriented firms and tend to be more volatile 5 | |
how to invest in preferred stock | investors can trade for preferred stock just like common stock however because of how they differ from common stock investors need a different approach when investing in them researching the issuing company is essential investing in preferred stock from a shaky company is as risky as buying its common stock if the company fares poorly both types of stock are likely to produce losses one key thing to consider when choosing preferred stock is the dividend compare the dividends you ll receive relative to the share price to determine if the yield offers an attractive return a better yield can result in greater returns moreover take note of whether the stock is callable or convertible callable preferred stocks can be repurchased by the issuer at a preset date and price causing you to miss out on future dividends convertible preferred stock meanwhile can be converted into common stock at the company s discretion which can be an advantage if the price of the common stock rises significantly | |
how do i use common stock to vote at company meetings | most ordinary common shares come with one vote per share granting shareholders the right to vote on corporate actions often conducted at company shareholder meeting 11 if you cannot attend you can cast your vote by proxy where a third party will vote on your behalf 12 the most important votes are taken on issues like the company engaging in a merger or acquisition whom to elect to the board of directors or whether to approve stock splits or dividends | |
why is common stock called an equity | common stock represents a residual ownership stake in a company the right to claim any other corporate assets after all other financial obligations have been met a company maintains a balance sheet composed of assets and liabilities assets include what the company owns or is owed such as its property equipment cash reserves and accounts receivable on the other side of the ledger are liabilities which are what the company owes these include payables debts and other obligations if a company is healthy the total assets will be larger than the total liabilities the residual amount left to the owners is known as shareholders equity and is represented by a company s shares | |
why do companies issue preferred stock | selling preferred stock like any other shares lets a company raise money by selling a stake in the business a company may do this to raise capital for business expansion debt repayment or to invest in new projects preferred stocks are less dilutive of company ownership since they do not come with voting rights 6 they offer the issuing firm other benefits not least because being less volatile makes them appeal to different investors the fixed dividends also stabilize the company s balance sheet making it more attractive to additional investors another reason is that for some companies the cost of issuing preferred stock is lower than issuing bonds unlike interest payments on bonds dividends on preferred stock are not mandatory and generally are not tax deductible for the corporation however they might still be less costly than the higher interest rates a company might have to pay to entice bond investors | |
is preferred or common stock a better investment | each type has pros and cons common stock tends to offer higher potential returns but more volatility preferred stock may be less volatile but have a lower potential for returns 5 this suggests that long term investors who can handle greater volatility will prefer common stock while those who want to avoid such fluctuations are more likely to choose preferred stock | |
are there other different types of stock | common and preferred are the two major types some companies issue different classes of stock or even types of common stock for example alphabet the parent company of google has two classes of common stock goog and googl 13the bottom linecommon stock as its name implies is one of the most ordinary types of stock it gives shareholders a stake in the underlying business as well as voting rights to elect a board of directors and a claim to a portion of the company s assets and future revenues however common stockholders have a lower position than preferred stockholders who get priority on dividend payments and in recovering their investment if the company is liquidated | |
what is communism | communism is a political and economic ideology that positions itself in opposition to liberal democracy and capitalism it advocates instead for a classless system in which the means of production are owned communally and private property is nonexistent or severely curtailed understanding communismcommunism is an umbrella term that encompasses a range of ideologies the term s modern usage originated with victor d hupay an 18th century french aristocrat who advocated living in communes in which all property would be shared and all may benefit from everybody s work the idea was hardly new even at that time the bible s book of acts describes 1st century christian communities holding property in common according to a system known as koinonia this inspired later religious groups such as the 17th century english diggers to reject private ownership 1the communist manifestomodern communist ideology began to develop during the french revolution and its seminal tract karl marx and friedrich engels communist manifesto was published in 1848 that pamphlet rejected the christian tenor of previous communist philosophies laying out a materialist and scientific analysis of the history and future trajectory of human society the history of all hitherto existing society marx and engels wrote is the history of class struggles 2the communist manifesto presented the french revolution as a major historical turning point when the bourgeoisie the merchant class that was in the process of consolidating control over the means of production overturned the feudal power structure and ushered in the modern capitalist era that revolution replaced the medieval class struggle that pitted the nobility against the serfs with the modern one pitting the bourgeois owners of capital against the proletariat the working class who sell their labor for wages marx engels and their followers advocated for and predicted as historically inevitable a global proletarian revolution in the communist manifesto and later works they stated that it would first usher in an era of socialism then of communism the final stage of human development would mark the end of class struggle and therefore of history in communist theory all people would live in social equilibrium without class distinctions family structures religion or property the state would wither away too as a popular marxist slogan puts it the communist economy would function from each according to his ability to each according to his needs 3the soviet unionmarx and engels theories wouldn t be tested in the real world until after their deaths an uprising in russia toppled the czar and sparked a civil war in 1917 during world war i that eventually saw a group of radical marxists led by vladimir lenin gain power in 1922 this group was called the bolsheviks it founded the soviet union on former imperial russian territory and attempted to put communist theory into practice 4lenin had developed the marxist theory of vanguardism before the bolshevik revolution this theory argued that a close knit group of politically enlightened elites was necessary to usher in the higher stages of economic and political evolution socialism and finally communism lenin died shortly after the civil war ended but the dictatorship of the proletariat led by his successor joseph stalin would pursue brutal ethnic and ideological purges as well as forced agricultural collectivization tens of millions died during stalin s rule from 1922 to 1953 on top of the tens of millions who died as a result of the war with nazi germany 5the soviet state became a powerful one party institution rather than withering away it prohibited dissent and occupied the commanding heights of the economy agriculture the banking system and industrial production were subject to quotas and price controls laid out in a series of five year plans 4this system of central planning enabled rapid industrialization and growth in soviet gross domestic product gdp outpaced that of the u s from 1950 to 1965 the soviet economy generally grew at a much slower pace than its capitalist democratic counterparts however 6weak consumer spending was a particular drag on growth central planners emphasis on heavy industry led to chronic underproduction of consumer goods long lines at understocked grocery stores were a fixture of soviet life even during periods of relative prosperity the soviet union collapsed in 1991 after a push to reform the economic and political system and provide greater room for private enterprise and free expression these reform pushes were known as perestroika and glasnost respectively they didn t halt the economic decline the soviet union suffered in the 1980s and likely hastened the communist state s end by loosening its grip on sources of dissent 7communist chinamao zedong s communist party gained control of china in 1949 after more than 20 years of war with the chinese nationalist party and imperial japan it formed the world s second major marxist leninist state 8 mao allied the country with the soviet union but the soviets policies of de stalinization and peaceful coexistence with the capitalist west led to a diplomatic split with china around 1958 9mao s rule in china resembled stalin s in its violence deprivation and insistence on ideological purity the communist party ordered the rural population to produce enormous quantities of steel during the great leap forward from 1958 to 1962 to jumpstart an industrial revolution in china 9the same period s great chinese famine killed at least 16 million people and perhaps more than 45 million 10 the cultural revolution an ideological purge that lasted from 1966 until mao s death in 1976 killed perhaps another 1 6 million people and subjected millions of others to political persecution 11deng xiaoping introduced a series of market reforms after mao s death that remained in effect under his successors the u s began normalizing relations with china when president nixon visited in 1972 before mao s death the chinese communist party ccp remains in power presiding over a largely capitalist system although state owned enterprises continue to form a large part of the economy freedom of expression is significantly curtailed and meaningful opposition to the reigning communist party isn t permitted it would take a miracle for the ccp to be ousted 1213the year marked the collapse of the soviet union and the end of the cold war between that power and the u s the cold warthe u s emerged from world war ii as the world s richest and most militarily powerful nation the country if not all its people felt a sense of exceptionalism and historical purpose as a liberal democracy that had just defeated fascist dictatorships in two theaters the soviet union its ally in the fight against germany and the world s only revolutionary marxist state did as well the two powers promptly divided europe into spheres of political and economic influence winston churchill called this dividing line the iron curtain 14the two superpowers both possessed nuclear weapons after 1949 and they engaged in a long standoff known as the cold war the closest the u s came to direct military conflict with the soviet union was the 1962 cuban missile crisis the u s did fight a prolonged war in vietnam however in which its military supported south vietnamese forces fighting the chinese and soviet supported north vietnamese army and south vietnamese communist guerrillas the u s withdrew from the war and vietnam was united under communist rule in 1975 the cold war ended with the collapse of the soviet union in 1991 15communism failed for several reasons including a lack of profit incentives among citizens the failure of central planning and the impact of power being seized by such a small number of people who then exploited it and gamed the system | |
why did communism fail | there s been extensive study of the reasons for communism s failure but researchers have pinpointed a couple of common factors that contributed to its demise the first is an absence of incentives among citizens to produce for profit the profit incentive leads to competition and innovation in society but an ideal citizen in a communist society was selflessly devoted to societal causes and rarely thought about their own welfare 16the second reason for communism s failure was the system s inherent inefficiencies such as centralized planning this form of planning requires aggregation and synthesis of enormous amounts of data at a granular level all projects were planned centrally so this form of planning was also complex growth data was fudged or error prone in several cases to make facts fit into planned statistics and create an illusion of progress the concentration of power in the hands of a select few also bred inefficiency and provided them with incentives to game the system for their benefit and retain their hold on power corruption and laziness became endemic features of this system surveillance such as that characterized east german and soviet societies was common it also disincentivized industrious and hard working people the economy suffered in the end | |
what is an example of communism | an example of communism would be a commune where people live together and share responsibilities and possessions many of these communities function well but they tend to be small in scale | |
what countries are still communist | communism is the official form of government in china cuba laos north korea and vietnam these countries also abide by some capitalist principles however they re largely autocratic and they don t reflect marx s definition of the term 17 | |
what is the difference between communism and socialism | both communism and socialism advocate public over private ownership and they champion equality they seek to give power to the working class socialism is viewed as a more moderate ideology however unlike communism it permits the continued existence of capitalism in some parts of the economy and favors gradual change over revolution 18the bottom linecommunism has been around as a theory since the beginning of humanity but the french revolution karl marx and friedrich engels turned it into an influential political ideology the idea of a classless society in which all property and wealth are communally owned has been tarnished somewhat since then it has existed harmoniously in smaller communities but communism has so far failed to be successfully implemented on a larger level two major examples are russia and china where communist leaders ruled with violence and suppression and often gamed the system for their own benefit some say that this proves communism doesn t work others argue that these regimes deviated from communism and therefore shouldn t be considered as examples | |
what is the community reinvestment act cra | the community reinvestment act cra is a federal law enacted in 1977 to encourage depository institutions to meet the credit needs of the communities where they are chartered including low and moderate income neighborhoods 1the cra requires federal banking agencies to assess how well each institution fulfills its obligations to these communities the agencies must consider these performance ratings when evaluating applications for future approval of bank mergers charters acquisitions branch openings and deposit facilities 2understanding the community reinvestment act cra before the community reinvestment act and other fair housing laws u s banks systematically denied mortgages to black americans and other people of color who lived in certain areas redlined by a federal government agency called the home owners loan corporation holc 6 the holc created maps that classified neighborhoods across the country on a perceived level of lending risk based on information gathered from various sources including local appraisers loan officers city officials and real estate agents 7the neighborhoods were color coded on maps with each color representing the area s perceived risk to lenders holc deemed the red communities hazardous describing them as characterized by detrimental influences in a pronounced degree undesirable population or an infiltration of it 8 neighborhoods with predominantly racial and ethnic minority populations were colored red hence redlined the maps were a tool for widespread racial discrimination the immediate effect of redlining was that residents in these areas couldn t access credit to buy or improve their housing however the long term effects of redlining persist 9housing discrimination and lending discrimination are illegal 10 if you think you ve been discriminated against based on race religion sex marital status use of public assistance national origin disability or age you can file a complaint with the consumer financial protection bureau cfpb or the u s department of housing and urban development hud 1112the objective of the community reinvestment act was to strengthen existing laws requiring banks to sufficiently address the banking needs of all members of the communities they served three federal regulators the office of the comptroller of the currency occ the federal deposit insurance corporation fdic and the federal reserve board share oversight of the cra however the last is chiefly responsible for assessing whether state member banks are fulfilling their obligations under the law 13cra performance rankingthe federal reserve uses one of five methods to rank a bank s performance based on its size and mission though a 1995 update to the cra requires regulators to consider lending and investment data the evaluation process is somewhat subjective with no specific quotas that banks have to satisfy 14 still each bank is given one of the following ratings 15the fdic maintains an online database where the public can see a particular bank s score additionally banks are obliged to provide consumers with their performance evaluations upon request the cra applies to fdic insured depository institutions including national banks state chartered banks and savings associations however credit unions backed by the national credit union share insurance fund and other non bank entities are exempt from the legislation 16criticisms of the cracritics of the cra including some conservative politicians and pundits allege the law contributed to the risky lending practices that led to the financial crisis of 2008 they contend that banks and other lenders relaxed certain standards for mortgage approvals to satisfy cra examiners 17however some economists including neil bhutta and daniel ringo of the federal reserve bank argued in 2015 that cra based mortgages represented a small percentage of the subprime loans issued during the financial crisis as a result bhutta and ringo concluded the law was not a major factor in the housing market s subsequent downturn 18the cra has also received criticism that it has not been particularly effective though low and moderate income communities saw an influx of loans after the cra s passage research by the federal reserve s jeffrey gunther concluded that lenders not subject to the law that is credit unions and other non banks represented an equal share of those loans 19modernizing the cramore recently some economists and policymakers have suggested the law needs to be revised to keep up with changes in the industry and make the evaluation process less onerous for banks for example the physical location of bank branches remains a component in the scoring process even though an increasing number of consumers are conducting their banking online in a 2018 op ed piece former comptroller of the currency joseph otting asserted that the cra s outdated approach had led to investment deserts where cra activity often fails to reach by preventing banks from receiving consideration when they want to lend and invest in communities with a need for capital 20the office of the comptroller of the currency in may 2020 issued a final rule to strengthen and modernize existing community reinvestment act regulations according to a news release the proposed changes received more than 7 500 comments from stakeholders in response to the notice of proposed rulemaking announced on dec 12 2019 21critics such as the national community reinvestment coalition said the new rule would reduce banks public accountability to communities by limiting consideration of bank branches and bank deposit accounts in communities 2223 but otting said it strengthened and modernized the law saying the final rule increased credit for mortgage origination to promote affordable mortgage availability in lower and moderate income areas 24however in december 2021 the occ rescinded the june 2020 rule to be replaced with a rule designed jointly by the occ federal reserve and fdic 25 on may 5 2022 the agencies jointly proposed a new rule intended to account for the ubiquity of online banking and distribute reinvestment more broadly across the country 26in 2023 the office of the comptroller of the currency the federal reserve board and the federal deposit insurance corporation issued a final rule to modernize regulations implementing the cra the final rule focuses on eight key objectives including strengthening the cra s core purpose adapting to changes in the banking industry promoting transparency and ensuring consistency in regulatory approaches 27 | |
what are the u s fair lending laws | fair lending laws prohibit lenders from discriminating based on specific protected classes during any aspect of a credit transaction several statutes comprise federal fair lending laws and regulations including the 28 | |
what is redlining | redlining is the now illegal discriminatory practice of denying credit to residents of certain areas based on their race or ethnicity sociologist john mcknight coined the term in the 1960s to describe maps created by the home owners loan corporation a u s government agency that marked racial and ethnic minority neighborhoods in red labeling them hazardous to lenders 29 | |
what factors can lenders consider when making loans | lending institutions can only consider factors relevant to an applicant s creditworthiness their ability to pay it s illegal for lenders to consider factors that are unrelated to creditworthiness including the applicant s race color religion national origin sex marital status age and participation in public assistance programs 30the bottom linethe cra ensures that federally insured banks address the credit needs of their entire community particularly low and moderate income neighborhoods established to combat redlining the cra has evolved with the banking industry especially with the rise of online banking while some have criticized the cra for its role in the 2008 financial crisis and question its effectiveness many believe that the cra remains vital for promoting equitable access to credit recent updates aim to modernize the cra focusing on transparency and adapting to current banking practices to ensure fair financial services for all communities | |
what is a comparable company analysis cca | a comparable company analysis cca is a process used to evaluate the value of a company using the metrics of other businesses of similar size in the same industry comparable company analysis operates under the assumption that similar companies will have similar valuation multiples such as ev ebitda analysts compile a list of available statistics for the companies being reviewed and calculate the valuation multiples in order to compare them understanding comparable company analysis cca one of the first things every banker learns is how to do a comp analysis or comparable company analysis the process of creating a comparable company analysis is fairly straightforward the information the report provides is used to determine a ballpark estimate of value for the stock price or the firm s value comparable company analysiscomparable company analysis starts with establishing a peer group consisting of similar companies of similar size in the same industry or region investors are then able to compare a particular company to its competitors on a relative basis this information can be used to determine a company s enterprise value ev and to calculate other ratios used to compare a company to those in its peer group relative vs comparable company analysisthere are many ways to value a company the most common approaches are based on cash flows and relative performance compared to peers models that are based on cash such as the discounted cash flow dcf model can help analysts calculate an intrinsic value based on future cash flows this value is then compared to the actual market value if the intrinsic value is higher than the market value the stock is undervalued if the intrinsic value is lower than the market value the stock is overvalued in addition to intrinsic valuation analysts like to confirm cash flow valuation with relative comparisons and these relative comparisons allow the analyst to develop an industry benchmark or average the most common valuation measures used in comparable company analysis are enterprise value to sales ev s price to earnings p e price to book p b and price to sales p s if the company s valuation ratio is higher than the peer average the company is overvalued if the valuation ratio is lower than the peer average the company is undervalued used together intrinsic and relative valuation models provide a ballpark measure of valuation that can be used to help analysts gauge the true value of a company valuation and transaction metrics used in compscomps can also be based on transaction multiples transactions are recent acquisitions in the same industry analysts compare multiples based on the purchase price of the company rather than the stock if all companies in a particular industry are selling for an average of 1 5 times market value or 10 times earnings it gives the analyst a way to use the same number to back into the value of a peer company based on these benchmarks | |
what is comparative advantage | comparative advantage is an economy s ability to produce a particular good or service at a lower opportunity cost than its trading partners comparative advantage is used to explain why companies countries or individuals can benefit from trade in the context of international trade comparative advantage refers to the products that a country can produce more cheaply or easily than other countries however some contemporary economists contend that focusing solely on comparative advantage can result in the exploitation and depletion of a country s resources the law of comparative advantage is popularly attributed to english political economist david ricardo and his book on the principles of political economy and taxation written in 1817 although it is likely that ricardo s mentor james mill originated the analysis 1investopedia joules garciaunderstanding comparative advantagecomparative advantage is one of the most important concepts in economic theory and a fundamental tenet of the argument that all actors at all times can mutually benefit from cooperation and voluntary trade it is also a foundational principle in the theory of international trade the key to understanding comparative advantage is a solid grasp of opportunity cost put simply an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another in the case of comparative advantage the opportunity cost that is to say the potential benefit that has been forfeited for one company is lower than that of another the company with the lower opportunity cost and thus the smallest potential benefit which was lost holds this type of advantage another way to think of comparative advantage is as the best option given a trade off if you re comparing two different options each of which has a trade off some benefits as well as some disadvantages the one with the best overall package is the one with the comparative advantage people learn their comparative advantages through wages this drives people into those jobs that they are comparatively better at if a skilled mathematician earns more money as an engineer than as a teacher they and everyone they trade with are better off when they practice engineering wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently the greater the diversity in people and their skills the greater the opportunity for beneficial trade through comparative advantage example of comparative advantageas an example consider a famous athlete like michael jordan as a renowned basketball and baseball star michael jordan is an exceptional athlete whose physical abilities surpass those of most other individuals michael jordan would likely be able to say paint his house quickly owing to his abilities as well as his impressive height hypothetically say that michael jordan could paint his house in eight hours in those same eight hours though he could also take part in the filming of a television commercial which would earn him 50 000 by contrast jordan s neighbor joe could paint jordan s house in 10 hours in that same period of time he could also work at a fast food restaurant and earn 100 in this example joe has a comparative advantage as a house painter due to his lower opportunity cost and despite the fact that michael jordan could paint the house faster and better the best trade would be for michael jordan to film a television commercial and to pay joe to paint his house so long as michael jordan makes the expected 50 000 and joe earns more than 100 the trade is a winner owing to their diversity of skills michael jordan and joe would likely find this to be the best arrangement for their mutual benefit comparative advantage vs absolute advantagecomparative advantage is contrasted with absolute advantage absolute advantage refers to the ability to produce more or better goods and services than somebody else comparative advantage refers to the ability to produce goods and services at a lower opportunity cost not necessarily at a greater volume or quality to see the difference consider an attorney and their secretary the attorney is better at producing legal services than the secretary and is also a faster typist and organizer in this case the attorney has an absolute advantage in both the production of legal services and secretarial work nevertheless they benefit from trade thanks to their comparative advantages and disadvantages suppose the attorney produces 175 per hour in legal services and 25 per hour in secretarial duties the secretary can produce 0 in legal services and 20 in secretarial duties in an hour here the role of opportunity cost is crucial to produce 25 in income from secretarial work the attorney must lose 175 in income by not practicing law their opportunity cost of secretarial work is high they are better off by producing an hour s worth of legal services and hiring the secretary to type and organize the secretary is much better off typing and organizing for the attorney their opportunity cost of doing so is low it s where their comparative advantage lies comparative advantage is a key insight that trade will still occur even if one country has an absolute advantage in all products comparative advantage vs competitive advantagecompetitive advantage refers to a company economy country or individual s ability to provide a stronger value to consumers as compared with its competitors it is similar to but distinct from comparative advantage in order to assume a competitive advantage over others in the same field or area it s necessary to accomplish at least one of three things the company should be the low cost provider of its goods or services it should offer superior goods or services than its competitors or it should focus on a particular segment of the consumer pool comparative advantage in international tradedavid ricardo famously showed how england and portugal both benefit by specializing and trading according to their comparative advantages in this case portugal was able to make wine at a low cost while england was able to cheaply manufacture cloth ricardo predicted that each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate indeed as time went on england stopped producing wine and portugal stopped manufacturing cloth both countries saw that it was to their advantage to stop their efforts at producing these items at home and instead to trade with each other in order to acquire them comparative advantage is closely associated with free trade which is seen as beneficial whereas tariffs closely correspond to restricted trade and a zero sum game a contemporary example china s comparative advantage with the united states is in the form of cheap labor chinese workers produce simple consumer goods at a much lower opportunity cost the united states comparative advantage is in specialized capital intensive labor american workers produce sophisticated goods or investment opportunities at lower opportunity costs specializing and trading along these lines benefit each the theory of comparative advantage helps to explain why protectionism is typically unsuccessful adherents to this analytical approach believe that countries engaged in international trade will have already worked toward finding partners with comparative advantages if a country removes itself from an international trade agreement and imposes tariffs it may produce a local benefit in the form of new jobs and industry however this is not a long term solution to a trade problem eventually that country will be at a disadvantage relative to its neighbors countries that were already better able to produce these items at a lower opportunity cost the classical understanding of comparative advantage does not account for certain disadvantages that come from over specialization for example an agricultural country that focuses on cash crops and relies on the world market for food could find itself vulnerable to global price shocks criticisms of comparative advantage | |
why doesn t the world have open trading between countries when there is free trade why do some countries remain poor at the expense of others perhaps comparative advantage does not work as suggested there are many reasons this could be the case but the most influential is something that economists call rent seeking rent seeking occurs when one group organizes and lobbies the government to protect its interests | say for example the producers of american shoes understand and agree with the free trade argument but they also know that their narrow interests would be negatively impacted by cheaper foreign shoes even if laborers would be most productive by switching from making shoes to making computers nobody in the shoe industry wants to lose their job or see profits decrease in the short run this desire leads the shoemakers to lobby for say special tax breaks for their products or extra duties or even outright bans on foreign footwear appeals to save american jobs and to preserve a time honored american craft abound even though in the long run american laborers would be made relatively less productive and american consumers relatively poorer by such protectionist tactics advantages and disadvantages of comparative advantagein international trade the law of comparative advantage is often used to justify globalization since countries can have higher material outcomes by producing only goods where they have a comparative advantage and trading those goods with other countries countries like china and south korea have made major productivity gains by specializing their economies in certain export focused industries where they had a comparative advantage following comparative advantage increases the efficiency of production by focusing only on those tasks or products that one can achieve more cheaply products that are more expensive or time consuming to make can be purchased from elsewhere in turn this will improve a company s or a country s overall profit margins since costs associated with less efficient production will be eliminated on the other hand over specialization also has negative effects especially for developing countries while free trade allows developed countries to access cheap industrial labor it also has high human costs due to the exploitation of local workforces by offshoring manufacturing to countries with less stringent labor laws companies can benefit from child labor and coercive employment practices that are illegal in their home countries likewise an agricultural country that focuses only on certain export crops may find itself suffering from soil depletion and destruction of its natural resources as well as harm to indigenous peoples moreover there are also strategic disadvantages to over specialization since that country would find itself dependent on global food prices 2higher efficiencyimproved profit marginslessens the need for government protectionismdeveloping countries may be kept at a relative disadvantagemay promote unfair or poor working conditions elsewherecan lead to resource depletionrisk of over specializationmay incentivize rent seekingwho developed the law of comparative advantage the law of comparative advantage is usually attributed to david ricardo who described the theory in on the principles of political economy and taxation published in 1817 however the idea of comparative advantage may have originated with ricardo s mentor and editor james mill who also wrote on the subject 3 | |
how do you calculate comparative advantage | comparative advantage is usually measured in opportunity costs or the value of the alternative goods that could be produced with the same resources this is then compared with the opportunity costs of another economic actor to produce the same goods for example if factory a can make 100 pairs of shoes with the same resources it takes to make 500 belts then each pair of shoes has an opportunity cost of five belts if competitor factory b can make three belts with the resources it takes to make one pair of shoes then factory a has a comparative advantage in making belts and factory b has a comparative advantage in making shoes | |
what is an example of comparative advantage | an interesting example of comparative advantages often arises for high powered executives who may consider hiring an assistant to answer their emails and perform certain secretarial functions the executive may even better at performing these duties than their assistant but the time they spend doing secretarial work could be spent more profitably by doing executive work likewise even if the assistant is mediocre at secretarial work they would likely be even more ill suited for executive work together they are ultimately more productive if they focus on their comparative advantages the bottom linecomparative advantage is one of the most important concepts in economics in classical economics this idea explains why people countries and businesses can experience greater collective benefits through trade and exchange than they can produce alone however contemporary economists have also pointed out that these gains can be one sided or result in exploitation of the weaker parties | |
what is a comparative market analysis | a comparative market analysis cma estimates a home s price based on recently sold similar properties in the immediate area real estate agents and brokers create cma reports to help sellers set listing prices for their homes and help buyers make competitive offers in addition you can perform your own comparative market analysis by researching comparable properties known as comps on real estate listing sites such as realtor com understanding comparative market analysisa comparative market analysis helps sellers choose the best listing prices for their homes the best price is one that s not so low it leaves the seller in more debt or so high the home won t sell for buyers a cma can verify if a home is in the right price range and help pinpoint a competitive offer that will be taken seriously without going overboard a cma compares a property to other homes similar in location size and features ideally a cma uses recently sold homes from the same subdivision of course finding homes that sold within the last three to six months in the immediate area can be difficult if you re in a low volume or rural real estate market in these cases a formal appraisal might be a better option a comparative market analysis is a price estimate so real estate agents and brokers don t need an appraiser s license to perform a cma while serving clients | |
when a real estate agent or broker conducts a comparative market analysis they will create a report that details the findings there s no standardized cma report however it s important to note that some states have statutes that require specific information be included in cmas 1 | that said a cma typically includes cma vs appraisala cma is completed by a real estate agent the seller or the buyer using comparable homes to estimate a price this estimated price can then be used for negotiating a sales price an appraisal requires a state licensed and certified appraiser the appraiser compares homes similar in size layout and location then they evaluate housing market conditions and generate a report with the home s market value the appraisal value is used by lenders to establish the amount a buyer is approved for the key difference is a cma establishes a home s price whereas an appraisal establishes its value price is what you pay for something while value is what it is worth | |
how to do a comparative market analysis | a cma involves much more than just comparing the prices of recently sold homes in the area here s a rundown of the basic steps for creating an accurate cma to set the right listing price or ensure a home you re interested in is a good deal the cma should consider the neighborhood s general quality for example it should consider the more attractive blocks and address community amenities nuisances and hoa rules equally important for inclusion are school proximity and curb appeal if a real estate agent or broker does the cma they will review the existing listing if there is one and make an in person visit to gather information about the home they ll take note of the home s size particularly the liveable space age style construction condition layout finishes landscaping upgrades and updates find three to five comparable homes in the area that have sold recently as close to the home as possible ideally the comps will be within one mile of the property and in the same school district focus on similar houses in terms of square footage lot size bedrooms bathrooms and type of construction pay close attention to when the comparable property sold the more recent the better real estate prices can fluctuate rapidly the comps should have the same placement if the home has a unique location such as overlooking a golf course or the waterfront the next step is to adjust for differences between the home and each comparable property an experienced real estate agent or broker can assign a price to each of the differences and adjust the price of each comp accordingly it may seem counter intuitive but if the comp has an inferior feature a positive adjustment is made to the price of the comp and vice versa for example if a comp has an extra bedroom a superior feature it is reasonable to assume that the buyer paid more to get the extra bedroom in this case you would deduct an amount from the comp to account for the extra bedroom thereby allowing an apples to apples comparison therefore the price of the target home is never adjusted after adjusting for differences divide the adjusted price of each comp by its square footage to determine the sold price per square foot next add the sold price per square foot of all the comps and divide by the number of comps to get the average finally multiply this average by the square feet of the property to estimate its price example of a comparative market analysismany real estate agents and brokers use software to generate comprehensive and professional looking cma reports if you plan to create your own use a spreadsheet to keep track of your research or try an online home price tool offered by one of the real estate listing websites below is an example of a cma report | |
is a cma as good as an appraisal | a comparative market analysis can reveal a property s fair price range however it is not considered by lenders or real estate experts to be as good or accurate a method as an appraisal by a licensed and certified appraiser | |
what does a cma include | a cma generally compares a home s location size age style materials and condition against similar homes sold within the last six months to arrive at an estimated price | |
what is the purpose of a cma | a cma allows sellers to establish a fair asking price it lets buyers see if the seller is asking a reasonable price for the home | |
what is the biggest difference between a cma and an appraisal | a comparative market analysis can be done by agents brokers buyers or sellers an appraisal can only be done by a licensed and state certified appraiser the bottom linein general the best comps are the ones that are the most similar to the home more recently sold with the fewest adjustments required depending on the market the final price might need to be tweaked slightly for example if the market is hot or inventory is low the price might be slightly higher conversely if there are many similar homes on the market the price might have to come down to be competitive | |
what are compensatory damages | compensatory damages are money awarded to an injured party that compensate for damages injury or another incurred loss compensatory damages are awarded in civil court cases where loss has occurred as a result of the negligence or unlawful conduct of another party to receive compensatory damages the plaintiff has to prove that a loss occurred and that it was attributable to the defendant the plaintiff must also be able to quantify the amount of loss in the eyes of the jury or judge actual damages are intended to provide the monetary amount necessary to replace what was lost and nothing more usually compensatory damages are awarded in civil court cases in order to compensate for damages injury or another incurred loss as we ll explore further in the article they are different from punitive and treble damages compensatory damages can be classified into two types actual and general examples of actual compensatory damagesto be awarded actual compensatory damages the plaintiff must prove that losses suffered equate to a defined monetary value also states might mandate collateral source rules csrs that prevent the reduction of awarded damages due to payment recovered from a third party examples of general compensatory damagesgeneral compensatory damages meanwhile include estimates of loss not involving actual monetary expenditure some courts use the multiplier method which calculates general damages by multiplying the sum total of one s actual damages by a number that signifies the seriousness of the injury in other jurisdictions courts will use the per diem method which attaches a dollar value to each day a plaintiff suffers and adds the value of all those days together in some cases a court will use a hybrid of these two methods to calculate general compensatory damages these general compensatory damages include compensatory damages are typically awarded in medical malpractice lawsuits usually for medical bills hospital bills rehabilitation expenses and compensation for lost earnings some compensatory damages can be difficult to assess for example the value of lost wages will be much higher for a more affluent member of society versus someone who is poor or retired | |
what is the difference between compensatory damages and punitive damages | compensatory damages differ from punitive damages which may compensate over and above any loss or damage incurred and are meant to provide an incentive against repeating the act that caused the plaintiff s loss or damages cases related to compensatory and punitive damages are a major source of debate in the field of health insurance as proponents of tort reform claim that excessive damages above the actual loss incurred can increase the overall cost of healthcare compensatory damages are intended to compensate the plaintiff of a lawsuit with enough money to cover the loss caused by the defendant | |
what is the difference between compensatory damages and treble damages | treble damages are also a kind of punitive damage meant to dissuade others from committing the same offense often treble damages which indicate that a statute exists to award a plaintiff up to three times actual or compensatory damages are invoked when a defendant has purposefully or willfully violated a law | |
what is another word for compensatory | another word to describe compensatory damages is offsetting redeeming or remunerative | |
what is a compensatory activity | as it applies to the law compensatory activities are usually awarded in the form of monetary payments | |
what are the 3 types of damages | the three types of damages are economic damages non economic damages and punitive damages | |
what are general compensatory damages | general compensatory damages cover all non monetary damages when referencing an injury claim such as for pain and suffering | |
do compensatory damages include emotional distress | compensatory damages can refer to emotional distress including mental anguish and loss of enjoyment of life the bottom lineto receive compensatory damages the plaintiff has to prove that a loss occurred compensatory damages as the name implies hope to compensate for any damages whether physical emotional or mental they are not to be confused with punitive or treble damages correction july 30 2023 this article previously stated that treble damages are invoked when a plaintiff has purposely or willfully violated a law it has been corrected to read that damages are invoked when a defendant has purposely or willfully violated a law | |
what is competitive intelligence | competitive intelligence sometimes referred to as corporate intelligence refers to the ability to gather analyze and use information collected on competitors customers and other market factors that contribute to a business s competitive advantage competitive intelligence is important because it helps businesses understand their competitive environment and the opportunities and challenges it presents businesses analyze the information to create effective and efficient business practices | |
how competitive intelligence works | by definition competitive intelligence assembles actionable information from diverse published and unpublished sources collected efficiently and ethically ideally a business successfully employs competitive intelligence by cultivating a detailed enough portrait of the marketplace so it may anticipate and respond to challenges and problems before they arise competitive intelligence transcends the simple clich know your enemy rather it is a deep dive exercise where businesses unearth the finer points of competitors business plans including the customers they serve and the marketplaces in which they operate competitive intelligence also analyzes how a wide variety of events disrupts rival businesses it also reveals how distributors and other stakeholders may be impacted and it telegraphs how new technologies can quickly render invalid every assumption within any organization competitive intelligence means different things to different people and departments for example to a sales representative it may refer to tactical advice on how best to bid for a lucrative contract to top management it may mean cultivating unique marketing insights used to gain market share against a formidable competitor the nature of competitive intelligence varies for different companies depending on the industry circumstance and a host of other factors for example companies that are impacted by politics and laws might require information about statutory changes that could affect the company s operations for any group the goal of competitive intelligence is to help make better informed decisions and enhance organizational performance by discovering risks and opportunities before they become readily apparent in other words competitive intelligence aims to prevent businesses from being caught off guard by any oppositional forces types of competitive intelligencelet s run through several more specific types of competitive intelligence this list is not meant to be exhaustive but it could include tactical competitive intelligence vs strategic competitive intelligencecompetitive intelligence activities can be grouped into two main silos tactical and strategic tactical intelligence is shorter term and seeks to provide input into issues such as capturing market share or increasing revenues strategic intelligence focuses on longer term issues such as key risks and opportunities facing the enterprise tactical competitive intelligence focuses on short term immediate needs and actions providing actionable insights that can be directly implemented to improve current operations this type of intelligence is often granular and specific targeting particular aspects of the business such as pricing strategies marketing campaigns or operational efficiencies for example a company might use tactical intelligence to adjust its pricing in response to a competitor s recent discount or to refine a marketing campaign based on recent consumer behavior data on the other end of the spectrum strategic competitive intelligence is oriented towards long term planning and overall business strategy it involves a broader and more comprehensive analysis of the competition including industry trends technology regulatory changes and macroeconomics for example strategic intelligence might highlight emerging market opportunities or potential threats from disruptive technologies guiding the company s future direction and investments the differences between tactical and strategic competitive intelligence also extend to the sources and methods used tactical intelligence often relies on real time data competitive benchmarking and direct observation of competitor activities this may include monitoring competitors websites social media customer reviews and financial reports for immediate insights strategic intelligence typically involves more extensive research and analysis including industry reports market research studies economic forecasts and expert opinions tactical competitive intelligence is more rapid and responsive while strategic competitive intelligence is more deliberate special considerationswhile most companies can find substantial information about their competitors online competitive intelligence goes beyond grabbing such easily accessible low hanging fruit only a small portion of competitive intelligence involves trawling the internet for information a typical competitive intelligence study includes information and analysis from various disparate sources including the news media customer and competitor interviews industry experts trade shows and conferences government records and public filings but these publicly accessible information sources are mere starting points competitive intelligence also encompasses investigating the full breadth of a company s stakeholders key distributors and suppliers as well as customers and competitors for proof of the growing importance of competitive intelligence look no further than the creation of the society of competitive intelligence professionals scip founded in the us in 1986 this global nonprofit group comprises a membership community of business experts across industry academia and government who regularly congress build out intelligence infrastructure share research decision support tools and advance collective analytical capabilities this group renamed strategic and competitive intelligence professionals in 2010 holds several national and international conferences and summits each year 1risks and downsides to competitive intelligencewhile competitive intelligence is a valuable tool for informing business strategy and decision making it also comes with certain risks and downsides companies need to be aware that in their pursuit of leading the market being competitive does come at a price one of the primary risks associated with competitive intelligence is the potential for unethical or illegal practices gathering information about competitors must be done legally and ethically to avoid issues such as corporate espionage privacy violations and breaches of confidentiality agreements consider the ethical and legal risks with the emergence of artificial intelligence while large language models have incredible capabilities there are considerations around how potentially private data is used to formulate those models competitive intelligence involves collecting and analyzing a wide range of data but there is always the risk of misinterpreting this data incorrect analysis or faulty assumptions can lead to misguided business decisions for instance overestimating a competitor s capabilities or misjudging market trends can result in strategic errors that might harm the company s competitive position the main issue here is data and information are subject to interpretation or subjectivity meaning different people can take a data set and come to a different outcome while it is important to understand what competitors are doing an overreliance on competitive intelligence can lead companies to become overly reactive rather than proactive this might result in a company focusing too much on mimicking competitors rather than innovating or pursuing its own strategic vision gathering and analyzing competitive intelligence can be resource intensive requiring significant time effort and financial investment for smaller companies or those with limited resources the cost of maintaining a robust competitive intelligence program may outweigh the benefits in the era of big data there is a risk of information overload where companies collect more data than they can effectively analyze and use sifting through vast amounts of information to find relevant insights can be challenging and time consuming which can be expensive to collect store and protect it s also entirely possible that rich useful data for competitive intelligence isn t properly used or analyzed last competitive intelligence activities can sometimes expose the company to security risks for example while monitoring competitors a company might inadvertently expose its own strategic intentions or sensitive information in addition companies may collect data on or from customers that need to be stored property by embarking on a competitive intelligence mission companies must ensure the underlying data is protected and secured | |
why is competitive intelligence important | competitive intelligence is important because it provides actionable insights that can help businesses anticipate market changes understand competitor strategies identify opportunities and threats and make informed strategic decisions it ultimately enhances a company s ability to compete effectively in the market | |
how is competitive intelligence gathered | competitive intelligence is gathered through a variety of methods those methods include public sources websites press releases financial reports direct observation trade shows store visits surveys interviews social media monitoring and specialized tools and databases | |
how does competitive intelligence differ from market research | competitive intelligence focuses specifically on competitors and the competitive environment providing insights that can inform strategic decisions market research on the other hand is broader and typically focuses on understanding the market as a whole including customer needs preferences and market trends | |
how often should competitive intelligence be conducted | competitive intelligence should be conducted on an ongoing basis with continuous monitoring of competitors and the market regular updates such as quarterly reports are also essential to keep the strategic insights current it may also make sense to perform competitive intelligence analysis after major events or key happenings the bottom linecompetitive intelligence is the process of gathering and analyzing information about competitors market trends and external factors to inform strategic business decisions it helps companies understand their competitive landscape anticipate market changes and gain a competitive edge | |
what is a competitive advantage | competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals these factors allow the productive entity to generate more sales or superior margins compared to its market rivals competitive advantages are attributed to a variety of factors including cost structure branding the quality of product offerings the distribution network intellectual property and customer service investopedia michela buttignolunderstanding competitive advantagecompetitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions the more sustainable the competitive advantage the more difficult it is for competitors to neutralize the advantage the two main types of competitive advantages are comparative advantage and differential advantage a comparative advantage is when a firm can produce products more efficiently and at a lower cost than its competitors a differential advantage is when a firm s products or services differ from its competitors offerings and are seen as superior advanced technology patent protected products or processes superior personnel and strong brand identity are all drivers of differential advantage these factors support wide margins and large market shares for example apple is famous for creating innovative products such as the iphone and supporting its market leadership with savvy marketing campaigns to build an elite brand another example is major drug companies they can market branded drugs at high price points because they are protected by patents competing on price can be effective but if you slash prices too much you risk decreasing profit margins to an untenable level many firms opt instead to differentiate themselves in other ways which helps preserve or expand their profit margin the term competitive advantage traditionally refers to the business world but can also be applied to a country organization or even a person who is competing for something competitive advantage areasto build a competitive advantage a company can use one of three main methods | |
how to build a competitive advantage | to build a competitive advantage a company must know what sets it apart from its competitors and then focus its message service and products with that difference in mind here are several strategies companies use to build a competitive advantage competitive advantage vs comparative advantagea firm s ability to produce a good or service more efficiently than its competitors which leads to greater profit margins creates a comparative advantage rational consumers will choose the cheaper of any two perfect substitutes offered for example a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area for imperfect substitutes like pepsi versus coke higher margins for the lowest cost producers can eventually bring superior returns economies of scale efficient internal systems and geographic location can also create a comparative advantage comparative advantage does not imply a better product or service it only shows the firm can offer a product or service of the same value at a lower price for example a firm that manufactures a product in china may have lower labor costs than a company that manufactures in the u s so it can offer an equal product at a lower price in the context of international trade economics opportunity cost determines comparative advantages amazon amzn is an example of a company focused on building and maintaining a comparative advantage the e commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate allowing it to rise to prominence largely through price competition |
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